Please see the following articles:

Sac Bee, Tues, 6/26: Energy-refund talks open on divisive note

Sac Bee, Tues, 6/26: Daniel Weintraub: Davis' energy contracts preserve
long-term pain

Sac Bee, Tues, 6/26: State, generators lock horns in talks

Sac Bee, Tues, 6/26: Davis commends 3 'heroes' in generator refunds fight

Sac Bee, Tues, 6/26: San Onofre blast released no radiation, spokesman says

Sac Bee, Mon, 6/25: Congress demands list of participants in Cheney energy
meetings

Sac Bee, Mon, 6/25: Creditor expects no quick fix in PG&E's venture into
bankruptcy

LA Times, Tues, 6/26: State, Power Firms Urged to Make a Deal

LA Times, Tues, 6/26: Commerical Real Estate Apartments to Provide Own Power

LA Times, Tues, 6/26: Officials Oppose Utility Choice Power

SF Chron, Tues, 6/26: Billions of dollars at stake as power talks begin

SF Chron, Tues, 6/26: Compromise urged in electricity refund talks

SF Chron, Tues, 6/26: Developments in California's energy crisis

SF Chron, Tues, 6/26: News briefs on California's power crisis

Mercury News, Tues, 6/26: The haggling over refunds is under way

OC Register, Tues, 6/26: Power workers supported

OC Register, Tues, 6/26: Judge sets tone at energy talks

NY Times, Tues, 6/26: California and Energy Providers in Talks Over Electric
Fees

NY Times, Tues, 6/26: Cheney Withholds List of Those Who Spoke to Energy Panel

WSJ, Tues, 6/26: Love, War and California Electricity

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Energy-refund talks open on divisive note
By David Whitney
Bee Washington Bureau
(Published June 26, 2001)
WASHINGTON -- More than 130 lawyers and corporate chiefs crowded into a
courtroom Monday to begin secret talks aimed at ending months of bitterness
and accusations over who should pay for California's haywire energy market.
But the largely closed-door sessions before a Federal Energy Regulatory
Commission judge could be doomed from the start by sharply divided estimates
of how much money it will take to leave the past behind and launch California
toward a new energy future.
The state says its consumers have been overcharged by at least $8.9 billion,
but Curtis Wagner, FERC's chief administrative law judge who is presiding
over the settlement negotiations, said he believes at most it will be $2
billion to $2.5 billion.
"We told everyone that $8.9 billion is the floor. It is the most conservative
possible number," Michael Kahn, a power grid official who is heading the
state's delegation, told reporters after Monday's talks.
The state's firm stance and Wagner's 15-day deadline for results had many
predicting that little would come of the talks.
"I believe California is going to scuttle the talks. I believe that nothing
will be good enough for them," said Arthur O'Donnell, editor of California
Energy Markets, an industry newsletter.
More than $6 billion of the state's claims involve deals that are ineligible
for refunds because of the seller or the date sold, O'Donnell said. FERC
doesn't have jurisdiction over all traders, and it already has excluded many
months of trades from refunds.
If the parties fail to settle within 15 days, Wagner has another week to
submit his own recommendations to the five FERC commissioners on how he
thinks they should resolve the disputes.
Wagner warned the parties that settlement would be the far preferable course.
"I can tell you now that you are far better off to work out the refund issue
in these settlement proceedings," the blunt-speaking judge said. "The time to
put California's past energy problems to rest and (to) structure a new
arrangement for California's energy future is now."
Wagner held out a carrot to the generators, who have been pummeled by Gov.
Gray Davis and state Attorney General Bill Lockyer over allegations of market
manipulation to drive up prices and their profits. "There are questions
concerning whether the settlement should offer immunity from existing and
future lawsuits and prosecutions against generators," Wagner said.
California argues that power plant owners and traders manipulated a badly
flawed market to drive up prices, racking up $9 billion in overcharges from
May 2000 until May 2001. But electricity sellers say they obeyed the law, and
they contend it's unfair to change the rules retroactively.
Assuming the refund issue is resolved, Wagner said there are at least six
other issues on the table. They include agreement on moving power out of the
volatile spot market and selling it under long-term contracts; eliminating
natural gas transmission constraints blamed for the high cost of gas in
California; and settlement of financial issues connected with PG&E's
bankruptcy filing.
Wagner began the brief, public opening of the negotiations by reading a
statement from FERC's two newest members, Patrick Wood III and Nora Mead
Brownell, the forces behind the order convening the talks.
Wood and Brownell said in a statement that it is in "everyone's best interest
to bring closure" to the crisis, and urged the participants to resist trying
to blame each other for the power debacle. "Everyone must leave (the
negotiations) with more than they came in with," they said.
But skepticism remained high Monday. "We didn't take two weeks to get into
this," said one participant late in the day. "It's hard to see how we'll get
out of this in two weeks."
Among the participants are legal teams representing about 50 government
agencies, utilities and power generators, including Pacific Gas and Electric
Co., Southern California Edison, San Diego Gas & Electric and their corporate
parents and subsidiaries.
The talks also include municipal utilities such as the Sacramento Municipal
Utility District, more than a dozen California towns and irrigation
districts, and utilities in Washington, Montana, Idaho, Colorado, New Mexico
and Arizona.
Meanwhile, FERC commissioners Wood and Brownell were in Sacramento to confer
with Davis and legislative leaders, then conduct a fact-finding hearing with
California regulators on the high price of natural gas.
Brownell and Wood, Davis said, are "committed to working together with us to
drive down the price of natural gas in California to get it closer to what
the rest of the country is paying."
"I think we are turning a corner," he said. "Conservation has been
spectacular. The outlook looks much more positive than it did two months
ago."
For more information: For the latest information on the state's energy
crisis, including rolling blackouts, visit www.sacbee.com. Also, sign up for
the latest news headlines and Stage 3 power alerts at
www.sacbee.com/news/news2go

The Bee's David Whitney can be reached at (202) 383-0004 or
dwhitney@mcclatchydc.com.
Bee Staff Writers Carrie Peyton and Emily Bazar contributed to this report.

Daniel Weintraub: Davis' energy contracts preserve long-term pain

(Published June 26, 2001)

With blackouts held at bay, federal price controls taking effect and the spot
market cost for wholesale electricity declining toward historic lows, things
are looking good for Gov. Gray Davis. If current trends continue, the
governor's public approval ratings might soon resemble one of those fever
charts tracking the meteoric rise in electricity prices last winter.
But even if his strategy turns out to be a political success, a major problem
created by the governor's approach will loom as a quiet threat to the state's
economy for years to come.
The centerpiece of his solution to the energy crisis was a series of 38
agreements with electricity generators under which the state will buy power
for the next 10 years. Davis signed those deals in desperation, just when
prices were peaking, with the very companies he has been accusing of gouging
the state.
Now that prices have begun to fall, Davis is taking credit. His advisers are
even trying to suggest that the existence of the long-term contracts has
contributed to the more favorable conditions in the market.
"It's economics 101," says David Freeman, one of the governor's closest
energy advisers.
But the most famous rule of economics 101 -- the law of supply and demand --
suggests that the contracts have little, if anything, to do with the recent
decline in electricity prices. In a properly functioning market, prices
decline when supply exceeds demand. When demand chases a limited supply,
prices climb. It's true that the contracts have reduced the state's demand
for power on the spot market. But they also have reduced, by an identical
amount, the supply of electricity available on the spot market. That
shouldn't have any effect on the price.
Long-term contracts, used prudently, are a fine idea, but they are not
necessary for a stable market to exist. For two years after California's
deregulation plan took effect, the state's utilities bought power at
rock-bottom prices without the benefit of any contracts at all. By state
edict, all electricity was bought and sold on the spot market, and as long as
supply was plentiful, the price was low. The generators were standing in line
to sell us their electricity.
Then, a little more than a year ago, things went haywire. Demand caught up
with supply, and at the same time, the price of natural gas, which is used to
produce most of our electricity, rose rapidly. The design of the electricity
system created by the state also appears to have allowed the private
generators to game the market. It's still not clear whether their behavior
was legal or not, but they did gain the upper hand. We needed their
electrons, and the generators suddenly were in the position to demand any
price they liked.
It was at just this moment that Davis decided to lock up as much electricity
as he could under contract. Wanting to avoid a retail rate increase that he
feared would prove unpopular, Davis sought the lowest possible price. To get
it, he signed contracts with the longest possible terms. Shorter terms would
have preserved the state's flexibility for the future. But the governor said
he was willing to pay a price for stability, and so he locked every customer
of Pacific Gas & Electric and Southern California Edison into his plan.
Some suggest it's unfair to second-guess Davis now that prices have begun to
decline and his contracts are starting to look expensive. Severin Borenstein,
an economist and energy expert at UC Berkeley, compares the governor's
strategy to buying homeowners insurance.
"If your house doesn't burn down," Borenstein says, "that doesn't mean it was
a mistake to buy the insurance."
The trouble is that Davis bought his policy after the house was already on
fire. Peter Navarro, a UC Irvine economics professor and consumer advocate,
warned at the time that the governor was pursuing a faulty strategy. He
correctly saw then that the same private generators on whom Davis was
declaring war were rubbing their hands at the prospect of signing deals with
the governor at top-of-the-market prices.
"They know there is going to be a highly competitive market in a couple of
years," Navarro told me in March. "Rather than have to fight it out in the
spot market at that point, of course they'd want to lock in 10-year
contracts. The governor is adopting a long-term strategy to address what is
essentially a short-term problem."
Now, with prices drifting back down even sooner than expected, Navarro is
more convinced than ever that Davis erred.
"The contracts were bargained in a panic from the utmost position of
weakness," Navarro said last week. "The cumulative effect of this strategic
error will be a cost in the billions. It will be like driving the California
economy with the emergency brake on."
Voters may never notice the drag. But if companies start eyeing lower
electricity rates in Nevada and Arizona, and jobs get harder to come by, all
of California will be paying a long-term price for the governor's desire to
avoid some short-term pain.

The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at
dweintraub@sacbee.com.

State, generators lock horns in talks

Davis' $8.9 billion refund call too high, judge says
By Toby Eckert
COPLEY NEWS SERVICE
June 26, 2001
WASHINGTON -- California officials staked out a tough bargaining position
yesterday at the start of talks aimed at resolving disputes over refunds and
other thorny issues arising from the state's power crisis.
California's lead negotiator, Michael Kahn, called the $8.9 billion in
refunds Gov. Gray Davis has demanded from power sellers "an extremely
conservative estimate" and indicated the state would reserve the right to
press for more in court.
The judge overseeing the hearings has called the state's refund estimate too
high.

Some power industry sources, meanwhile, were pessimistic about whether the
negotiations would lead to a settlement between the long-warring sides, given
the state's position.
Some 150 representatives from state agencies, cities, utilities and numerous
power-generating and marketing firms packed a hearing room at the Federal
Energy Regulatory Commission for the first day of the talks. The negotiators
will attempt to settle the state's claim that power sellers have gouged
California for more than a year, and the sellers' contention that they are
still owed billions of dollars for power they provided.
Pacific Northwest states were also invited into the discussions and are
seeking $6 billion in refunds from the power companies.
The electricity sellers deny wrongdoing, saying several factors converged to
drive up prices, including California's faulty power deregulation law, a huge
spike in the price of natural gas that is used to generate most electricity
in the state, and a short supply of electricity.
Speaking to reporters during a break in the closed-door session, Kahn said
the state would not trim its estimate of what it believes it is owed for
electricity overcharges. Kahn chairs the Independent System Operator, the
organization that manages most of California's power grid.
"Let there be no mistake. We are not going to ask the courts or FERC in
proceedings for $9 billion. We're going to ask for a lot more money than that
in our litigation position," he said. "The governor has said that he believes
FERC should order refunds at $8.9 billion now."
FERC Chief Administrative Law Judge Curtis Wagner Jr., who is mediating the
talks, has said he believes the refund amount the state is seeking is far too
high. A more realistic figure would be around $1 billion to $2.5 billion, he
said.
Wagner also said that one of the issues up for discussion would be whether
power generators should be offered immunity from current and future legal
action if a settlement is reached.
Kahn argued that the time period subject to refunds should start in May 2000,
when power prices started a dramatic upward spiral in California. Wagner had
indicated he would scrutinize prices going back only to October, when FERC
started examining the market.
When California officials took the price curbs that FERC approved last week
for future power sales and applied them to power charges going back to May
2000, the refunds owed to the state would came to roughly $9 billion, out of
$43.8 billion in total sales, Kahn said.
"I am absolutely confident that we have valid legal claims back to May. There
is no way that we are going to do anything to compromise those claims. That
includes last summer, when San Diegans were terribly overcharged," Kahn said.
"Last summer is a very important period to Californians that are seeking
redress. And we are not going to abandon those claims just because .?.?. FERC
has decided not to include them," he added.
Wagner asked the California officials to provide more information to back
their numbers.
Power sellers continued to maintain that Davis' estimates of excessive power
charges are wildly inflated. One group that represents generators gave a
bleak prognosis on the chances for a settlement.
"It's hard for us to contemplate how we're going to come to some agreement
with 130 players in the room," said Gary Ackerman, executive director of the
Western Power Trading Forum.
"We stand by our business dealings in California," said Richard Wheatley, a
spokesman for Reliant Energy, one of the companies targeted by the state for
refunds. "Our power was priced competitively."
But Wagner, a courtly veteran of such complex discussions, appeared to take
the sparring in stride.
"Everybody has to stick to their guns for a while," he told reporters after
the first day of talks ended. "Everybody has their say, and now we're getting
ready to get down to brass tacks."
Still, the starkly different positions taken by the state and the power
sellers illustrate the daunting task facing Wagner after months of bitter
charges and countercharges between the two sides. FERC, which ordered the
settlement talks as part of its price-curb order, gave the parties 15 days to
reach an agreement.
If they fail, Wagner will have an additional seven days to make a
recommendation to FERC.
"I can tell you now that you are far better off to work out the refund issue
in these settlement proceedings," Wagner admonished the parties before the
hearing room doors were closed to the media. "The time to put California's
past energy problems to rest and structure a new arrangement for California's
energy future is now."
Wagner, who underlined his role as a broker by sitting among the parties to
the talks instead of presiding from the bench, also warned the participants
not to talk to reporters about specific negotiations.
While most of the attention has focused on refunds, Wagner laid out a broad
agenda for the talks, including:
?Moving more power sales in California into long-term contracts and away from
the volatile spot market.
?Ensuring there is a "creditworthy party" to pay for power in California.
?Resolving concerns about the independence of the California grid manager,
the Independent System Operator, whose board is appointed by Davis.
?Exploring natural gas issues, including transportation constraints and high
prices in Southern California.
?The bankruptcy of California's largest utility, Pacific Gas and Electric,
which sought protection from creditors after it was unable to pay soaring
wholesale power costs.

Davis commends 3 'heroes' in generator refunds fight

By Bill Ainsworth
UNION-TRIBUNE STAFF WRITER
June 26, 2001
SACRAMENTO -- Gov. Gray Davis praised three former employees at Duke Energy's
Chula Vista plant as "heroes" yesterday for coming forward with allegations
that Duke policies created power shortages that raised electricity prices.
For the second time in recent days, the three plant veterans dominated events
in Sacramento with explosive allegations of mismanagement and market
manipulation by a company that has reaped enormous profits in California.
Ed Edwards, Glenn Johnson and Jimmy Olkjer made those claims, under oath, on
Friday before a state Senate committee.
Davis and other Democratic politicians yesterday said these first insider
accounts of how power plant operations might have manipulated prices will
help the state in its attempt to get $9 billion in refunds from Duke and
other energy generating companies.
"There's no question in my mind a lot of money has been stolen from
California, and these men are going to help us get it back," said
Assemblywoman Barbara Matthews, D-Tracy.
The ex-employees told Davis that Duke risked jeopardizing equipment by
constantly powering the 706-megawatt plant up and down, dumped new spare
parts and took working turbines off-line for "economic reasons."
Davis said the power plant workers confirmed his suspicions that North
Carolina-based Duke and other companies engaged in price gouging.
"There's a concerted effort to suck every dime out of California and send it
back to Houston or North Carolina," he said.
Davis cautioned that he hadn't yet heard Duke's version of events. "The
company is entitled to their point of view," he said. "But they've got some
explaining to do."
Duke Energy spokesman Tom Williams called the governor's meeting with the
former workers "unfair and unproductive."
Williams said a review of company logs shows that during a Stage 3 energy
alert the Chula Vista plant powered down under orders from California's
electricity grid manager, the Independent System Operator.
He said the company was doing its job by supplying the state with "spinning
reserves" that could be added to the system in 10 minutes to balance the load
-- that is, to make sure that supply equaled demand.
ISO spokeswoman Stephanie McCorkle said the agency buys four types of
ancillary services to balance the load, including spinning reserves.
But she said only Duke can release information from Jan. 16. Williams said
Duke soon plans to release logs from that day and several others.
Meanwhile, another former Chula Vista plant employee confirmed the
allegations of the other three workers. All of them had worked for San Diego
Gas & Electric when the utility owned the plant before Duke took over its
operation. Duke was required to keep the SDG&E employees on for two years,
but it then let many of them go.
Rick Connors, a former operator who turned down an offer from Duke to stay on
at the South Bay plant, said the plant output frequently was down for
"economic reasons."
The governor brought up those allegations during a subsequent meeting with
two new FERC commissioners, Pat Wood and Nora Brownell. Davis asked the
federal regulators to look into possible price gouging, the high price of
natural gas and the $9 billion in refunds he is seeking.
After meeting with Davis, Wood said he thinks California will emerge from the
energy crisis in 2003 or 2004 and become an energy trendsetter. He said he
believes California leaders have the will to build more power plants and
improve natural gas pipelines that fuel new generators. But he cautioned that
there will be "some short-term pain."
"I think you folks will seem some blackouts this summer," he said.
Staff writer Ed Mendel contributed to this report.

San Onofre blast released no radiation, spokesman says

But motorists on I-5 weren't so sure
By Bruce Lieberman
UNION-TRIBUNE STAFF WRITER
June 26, 2001
SAN ONOFRE -- Charlene Engel was driving with a few friends up Interstate 5
Sunday when she saw flames and smoke shoot suddenly skyward from the nuclear
power plant.
Pieces of silvery material were fluttering through the air and drifting
toward the freeway. Traffic began speeding up.
"Everybody sort of saw it and thought, 'Oh my God, have we just been
irradiated or what?'?" said Engel, a Rancho Bernardo artist.
In fact, the explosion of a transformer was far outside the twin reactors at
the San Onofre Nuclear Generating Station, and posed no radiation danger, Ray
Golden, a plant spokesman, said yesterday.
But Engel and her friends, who were heading to the Los Angeles County Museum
of Art for a Winslow Homer exhibit, didn't know that. "You don't actually
know how things are hooked up, so you don't want to hang around," Engel said.
"We moved north pretty quickly."
Santee resident Richard Carrico, whose niece was driving him to Dana Point,
said the fireball rose about 50 feet. "My God, I thought she was going to
faint," said Carrico, 93.
No one was injured in the explosion, which occurred at 11:03 a.m. and was
followed by a fire that lasted about 40 minutes. The transformer was
destroyed, but no other equipment at the plant was damaged and the twin
reactors continued to operate at full power without interruption, Golden
said.
Yesterday, San Onofre investigators were still trying to figure out why the
transformer failed. They should have some answers, and a new transformer
installed, in about a week.
The transformer was one of 54 in the plant's switching yard used to reduce
the voltage of a sample of outgoing electricity. The so-called "potential
transformers" step down the current sample to 115 volts so instruments can
test the amperage and wattage. Electricity leaves San Onofre at 238,000 volts
in transmission lines.
The explosion scattered shards of ceramic and aluminum debris, and 90 gallons
of burning insulation oil, hundreds of feet, Golden said. Pieces of the
transformer, some as large as one foot square, landed on Old Highway 101.
Plant operators feared debris would land on I-5, but the California Highway
Patrol did not report any there, a dispatcher said. The CHP received several
911 calls from drivers reporting a fireball.
The last time a potential transformer exploded at the plant's switching yard
was in 1994, Golden said. Plant workers discovered that corrosion caused by
ocean air rusted the transformer's carbon-steel casing, allowing water to
enter and contaminate the insulation oil.
After that, the plant replaced four transformers and repaired three. All are
periodically washed down with high-pressure fire hoses to prevent corrosion,
Golden said. He would not speculate on the cause of the latest explosion, or
whether it could lead to the replacement of other transformers.
"If the root cause shows that it needs to be repaired or replaced, it will,"
he said.
Although Sunday's explosion did not shut down the plant or release any
radiation, it was the latest in a string of mishaps this year. On Feb. 2, a
faulty circuit breaker ignited a fire and cut off lubricating oil to Unit 3's
turbine generators, causing about $45 million in damage and shutting the
reactor down for four months.
On May 30, a portable crane dropped 40 feet to the ground when a sling on a
large gantry crane failed. On June 6, workers inadvertently overfilled a
300-gallon steel bin with hydrazine, a toxic chemical used to purify water in
the plant's cooling systems, spilling about 20 gallons.
Golden said the four accidents this year do not indicate that the plant is
unsafe. "We perform hundreds, if not thousands, of work activities a day," he
said.

Congress demands list of participants in Cheney energy meetings

By Scott Lindlaw
ASSOCIATED PRESS
June 25, 2001
WASHINGTON ) Congressional investigators are intensifying pressure on the
White House to identify who met privately with Vice President Dick Cheney's
energy task force.
The General Accounting Office has sent Cheney's lawyer a 10-page letter
asserting a legal right to the lists and advising Cheney that it may make a
formal demand for the information, rather than the polite requests it has
made in recent weeks.
Comptroller General David M. Walker "is prepared to issue a demand letter ...
if we do not receive timely access to the information," the GAO said in a
10-page letter dated Friday from office General Counsel Anthony H. Gamboa to
David S. Addington, attorney for the vice president.
The GAO is the investigative arm of Congress, and it has legal authority to
federal agency records under the law. A demand letter could begin a legal
battle: It would give Cheney's office 20 days to respond, either by turning
over the names, or providing a reason why it is not compelled to do so, said
Lynn Gibson, a lawyer for the GAO.
If Cheney declined to turn over the records, the GAO would notify Congress
and Attorney General John Ashcroft, among others. The GAO would also be
authorized to file a civil action in court seeking the record, Gibson said.
She knew of no previous case in which the GAO was forced to go to court to
obtain agency records.
The White House team that developed the national energy plan, released last
month, met with more than 130 interest groups, from environmentalists and
unions, often at odds with Republicans, to major Bush supporters who got
private sessions with Cheney.
Reps. Henry Waxman, D-Calif., and John Dingell, D-Mich., in April asked the
GAO to provide information on who served on the task force, what information
was presented to the panel, who presented it and what the task force spent.
The White House has asserted that the GAO does not have the authority to ask
for names of participants. However, it agreed that the GAO is entitled to
financial records of the task force, and two administration officials said
the vice president's office provided 77 pages of financial documents to the
GAO last week.
The GAO contends it is entitled to a wider range of records. Federal law
"extends GAO's audit authority to all matters related to the use of public
money, not just matters related to costs of activities," it argued in its
letter to Cheney. "Over the years, GAO has conducted many reviews that
involve a wide range of White House programs and activities."
Juleanna Glover Weiss, a spokeswoman for Cheney, declined to comment on the
GAO's assertions, other than to say, "I'm sure the GAO and the vice
president's office will be talking about that."
Waxman and Dingell called on Cheney to provide the information they seek.
"The vice president should stop stonewalling and start cooperating with GAO's
investigation," Waxman said Monday. "Congress is entitled to know the
identity of the special interests that met with the Cheney energy task
force."

Creditor expects no quick fix in PG&E's venture into bankruptcy

By Ed Mendel
June 25, 2001
SACRAMENTO -- California's biggest utility, Pacific Gas and Electric, thought
it was moving toward an early exit from the power crisis by filing for
Chapter 11 bankruptcy in early April.
The top PG&E executive, Robert Glynn, optimistically told a Wall Street
publication that he hoped a settlement might be negotiated with creditors in
four to six months.
But an official with one of the 12 parties on the PG&E creditors committee,
which includes the Bank of America and the state of Tennessee, said he does
not see a quick end to the bankruptcy.
"My personal opinion," David Adante, executive vice president of Davey Tree
Surgery, said last week, "is that it's going to take longer than everyone
would like."
Adante said he thinks a resolution is likely to go beyond the bankruptcy
court and involve the state Public Utilities Commission, Gov. Gray Davis and
perhaps the Legislature.
"The rate part won't be resolved in the bankruptcy process," said Adante.
Davey Tree Surgery, which is based in Kent, Ohio, trims trees that encroach
on power lines for several California utilities.
PG&E owes Davey Tree $13 million, making it one of the smallest creditors on
a committee that includes big power providers, Enron and Dynegy, and big Wall
Street firms, Morgan Guaranty and Merrill Lynch.
A turning point in the PG&E bankruptcy may have come earlier this month when
the federal bankruptcy judge, Dennis Montali, declared that electricity rates
should be set by state regulators.
Experts disagreed about whether a bankruptcy judge could order a rate change
for a utility without the approval of state regulators, in this case the PUC.
"The public interest is better served by deference to the regulatory scheme
and leaving the entire regulatory function to the regulator," Montali ruled.
PG&E said it entered bankruptcy because the regulatory process failed,
denying a rate increase last fall that might have prevented the utility from
running up what it says is a debt of at least $8 billion.
PG&E also said the political process failed when, among other things, the
governor's negotiator broke a handshake agreement that included the state
purchase of PG&E's transmission system.
"But we have said all along that intersection with the regulatory and
political process would probably reoccur," a PG&E spokesman said last week.
The Legislature, after months of delay, held a hearing last week on the
governor's plan to keep Southern California Edison out of bankruptcy, which
includes the state purchase of the Edison transmission system.
Legislative leaders say the plan is too generous to Edison. Undaunted, Davis
hopes to win legislative approval of some version of his Edison plan, and
then persuade the PG&E creditors committee to accept a similar plan. But even
if Davis can get his rescue plan approved by the Legislature and the PG&E
committee, it's likely to be challenged with a ballot initiative by consumer
groups, who denounce the proposal as a "bailout" for utilities.
Meanwhile, the period in which only PG&E can file a bankruptcy reorganization
plan ends Aug. 5, allowing creditors or other parties to make proposals. And
if the Legislature does not act by Aug. 15, the agreement that the governor
negotiated with Edison can be waived by either party.
But of course, as with most things in the electricity crisis, the deadlines
could be extended.
ED MENDEL is Capitol bureau chief for the Union-Tribune.

State, Power Firms Urged to Make a Deal
Energy: Mediator says a refund pact would benefit both sides. Meanwhile,
Davis tones down his rhetoric as regulators come calling.

By MEGAN GARVEY and DAN MORAIN, Times Staff Writers

?????WASHINGTON--After being vilified for months by Gov. Gray Davis, federal
energy regulators here and in Sacramento took steps Monday to show they are
determined to respond to California's energy crisis.
?????A top federal regulator began mediating Davis' demand for nearly $9
billion in what the governor says are overcharges by power generators--and
warned a room full of dark-suited lawyers, energy executives and state
officials here that they will be "far better off" if they decide among
themselves how big a refund the state is due.
?????Meanwhile, in Sacramento, Patrick H. Wood III and Nora M. Brownell,
President Bush's first appointees to the five-member Federal Energy
Regulatory Commission, spent the afternoon conferring with Davis and
legislative leaders. Then they held a fact-finding hearing with California
regulators on the high price of natural gas, the fuel that spins most new
electricity turbines in California.
?????"We're going to be working together through tough issues," Brownell
said. "We're going to work through them and solve them and move forward. It
is a lot easier when people have sat down and gotten to know each other."
?????Davis has been attacking federal energy regulators--a majority of whom
are holdovers from the Clinton administration--for failing to take a variety
of steps to bail California out of its energy woes.
?????On Monday, however, Davis toned down his bellicose attacks on the
federal commission. Brownell and Wood, Davis said, are "committed to working
together with us to drive down the price of natural gas in California to get
it closer to what the rest of the country is paying."
?????"I think we are turning a corner," Davis said, as temperatures across
the state were moderate and electricity demand was low. "Conservation has
been spectacular. Californians have responded heroically. The federal
government is now finally taking some positive actions. The outlook looks
much more positive than it did two months ago."
?????The developments in Washington and Sacramento come as Davis issues
campaign-style demands for more aid from the federal government and as polls
show that voters are skeptical of how Davis and Bush are handling
California's energy crisis.
?????Republican lawmakers in Sacramento contend that the regulatory
commission has granted Davis virtually everything he has sought. The
commission earlier this month imposed temporary price restraints, a step
Davis said is helping to lower wholesale electricity prices paid by the state.
?????Senate Republican leader Jim Brulte said Monday that he has "no doubt"
the commission, known as FERC, will order power generators to issue refunds
to California, as Davis has requested.
?????But Brulte, of Rancho Cucamonga, also predicted that Davis will find the
order wanting: "The governor's game is a political one. . . . The Davis
administration has a clear strategy--that no matter what FERC does, it isn't
enough."
?????In Washington, the roughly 150 participants who showed up for day one of
a 15-day settlement conference on refunds showed little sign they were ready
to agree, at least not yet.
?????For now, the differences remain considerable: about $9 billion in
refunds demanded by California's representatives at the talks, plus $6
billion more that other Western states say they have been unfairly charged.
Power generators hotly dispute those figures.
?????"The time to put California's past energy problems to rest and structure
a new arrangement for California's energy future is now," said Curtis L.
Wagner, the chief administrative law judge for FERC. "We can do it if we try."
?????Wagner, who told reporters last week he believed refunds of about $2
billion were probably justified, is mediating the closed-door talks. Davis is
asking that the refunds cover the period since May 2000.
?????"These out-of-state energy companies are taking us for a ride," Davis
said in a brief interview in Sacramento on Monday. "I am determined to get
every penny back that California is owed. The generators have bilked us
mercilessly, and I'm fighting back. I'm not giving up nothing."
?????Consumers wouldn't see refunds directly. Rather, the money would go to
the state or to private utilities, such as Southern California Edison, for
electricity purchases made during the energy crisis.
?????Participants in the Washington meeting represent about 70 entities with
stakes in the electricity dispute. If they fail to reach agreement among
themselves within the allotted 15 days, Wagner will have seven days to make a
formal recommendation of his own to FERC's five-member governing board.
?????The settlement negotiations are confidential; Wagner promised those
present he would shred his notes and transcripts at their completion. He
allowed reporters in the hearing room, where oversized pots of coffee perched
on every table, only long enough to listen to his opening remarks and to a
prepared statement he read from two of the five FERC commissioners.
?????Wagner, who asked that all sides send advocates with the authority to
reach an agreement, said the issues to be resolved include:
?????* Refunds for past electricity purchases, including how much money is
involved and who needs to be paid.
?????* Moving additional quantities of electricity off the spot market and
into long-term contracts.
?????* Ensuring that generators receive payment for electricity already
provided.
?????* The bankruptcy of Pacific Gas & Electric.
?????Wagner said the talks also should address whether any settlement
provides generators with immunity from existing and future lawsuits and
prosecutions.
?????The statement from FERC commissioners Wood and Brownell encouraged
participants to "focus on what they absolutely need and not what they want."
But sorting out which is which may prove challenging.
?????The head of California's delegation, for example, reiterated Davis'
demands for $8.9 billion in refunds.
?????"We want our refunds. We want them now," Michael Kahn, one of Davis' top
energy advisors, told reporters during a break in the negotiations.
?????Kahn said the officials he is representing--the governor, state
legislators, the Electricity Oversight Board and the Public Utilities
Commission--consider the $8.9 billion figure to be an "extremely conservative
estimate."
?????He indicated the delegation had little interest in relinquishing the
right to sue for additional funds, even if power generators offered to make
refunds for time periods before the Oct. 2 cutoff that FERC has proposed.
?????As they have in the past, electricity generators staked out a far
different position, characterizing as "absurd" the state's overcharge
estimate.
?????"We've done absolutely nothing wrong," said Tom Williams, a spokesman
for Duke Energy Co., adding that his company was "gratified that all the
parties are at the table to discuss this."
?????The settlement negotiations were mandated by FERC last week as the
agency put in place an expanded "price mitigation plan" for Western
electricity markets.
---
?????Garvey reported from Washington, and Morain from Sacramento.

Copyright 2001 Los Angeles Times

Business; Financial Desk
Commerical Real Estate Apartments to Provide Own Power
MORRIS NEWMAN
?
06/26/2001
Los Angeles Times
Home Edition
Page C-1
Copyright 2001 / The Times Mirror Company
With its wall of fins, abstract patterns and varying surfaces and colors,
Colorado Court in Santa Monica is shaping up to be a real head-turner.
But the apartment complex is no mere exercise in style over substance. What
makes the project groundbreaking in power-starved California is that it will
generate nearly all its own energy: electricity , heat and hot water, all
from alternative technologies.
The 44-unit complex at 5th Street and Colorado Avenue, scheduled to open in
October, will be adorned with 199 solar panels, which will supply about a
third of the building's electricity . The rest of the power will come
primarily from a micro-turbine, a generator that runs on clean-burning
natural gas. Southern California Edison will supply only a fraction of the
building's energy needs.
"Colorado Court is unique because the building will produce 92% of its own
power, which is very significant," said Bob Johnson, managing director of
California Energy Coalition, a nonprofit energy conservation group based in
Laguna Beach. In comparison, solar power sources for a proposed single-family
subdivision in Placer County would supply 30% to 50% of household energy
needs.
Intended as "single-room occupancy" housing for low-income renters, the
$5.8-million Santa Monica project has become a closely watched test case of
still-experimental electricity generation equipment.
Though not outlandish, the Colorado Court building probably will make many
driving down 5th Street look twice: Framed inside a rectangular shell of
light-colored plaster and concrete is a giant window of dark glass; the
"window" is an assemblage of many solar panels. The rear of the building is
covered in an abstract pattern of vertical fins; the fins shade the
building's southern face from direct sunlight.
Sensible Concept for Low-Income Tenants
Although some may be surprised that a building intended for low-income
residents is the beneficiary of expensive energy technology, the concept
makes sense for people with limited incomes, said Robin Raida, project
manager for the builder, Community Corp. of Santa Monica. Energy efficiency
is "especially important in affordable housing, because our tenants don't
have extra money to spend on high utility bills," she said.
A host of public and private entities--including the cities of Santa Monica
and Irvine, Southern California Edison and the California Energy
Coalition--are involved in planning, funding and monitoring the innovative
building. The two cities, the conservation group and the utility have formed
a group known as Regional Energy Efficiency Initiative, which has contributed
about $250,000 to energy-saving devices in the building. In addition, Santa
Monica itself is contributing about $250,000 toward electricity generators.
The building will be loaded with energy-saving and environmentally benign or
"sustainable" devices. Heat from the micro-turbine will produce hot water,
eliminating the need for a conventional water heater.
The project also uses compact fluorescent lighting throughout the building,
insulation made from recycled material and double-pane windows with a layer
of heat-retardant krypton gas. Each apartment will be equipped with
energy-saving refrigerators that do not use chlorofluorocarbons, the widely
used refrigerant linked to damage in the Earth's ozone layer.
Prevailing breezes will cool the building, which will have no mechanical air
conditioners. The U-shaped structure "acts like a giant wind scoop," said
architect Larry Scarpa, a principal of Santa Monica-based Pugh & Scarpa.
In yet another "green" flourish, the building will collect all the rainwater
from the alley behind the property and funnel it into a series of underground
chambers. The water will slowly percolate back into the soil, which will
filter the pollutants from the water while preventing contaminated water from
spilling into Santa Monica Bay. The drainage system was paid for separately
by the city of Santa Monica.
The concept of a building that would be energy self-sufficient emerged about
two years ago, when Santa Monica officials met with members of the California
Energy Coalition. The city's Housing Division, which funds construction of
low-income housing, chose to make a low-income housing project into a dream
project of "green" construction, and Colorado Court became the target.
"We needed a demonstration project because a lot of developers feel that the
technologies are unproven," Raida said.
A number of apartment buildings in Santa Monica and Irvine are to be equipped
with energy-saving technology by the Regional Energy Efficiency Initiative,
but the Santa Monica building is the only project attempting to provide its
own power as well.
Rebates from the state Energy Commission helped defray the high cost of the
energy-generating equipment. The state's rebate on the solar panels, which
cost about $225,000, will be about $62,000. The $57,000 micro-turbine and
heat exchanger will yield a $15,000 rebate from Southern California Gas Co.
If recent research and development has yielded new ways of conserving energy
and producing electricity , regulations and building codes have not kept
pace.
Prospects Uncertain for Conventional Buildings
In one instance, architects had to obtain special permission from the city to
hang solar panels outside the exterior stairwells because building inspectors
said the solar panels "enclosed" the stairwells and triggered requirements
for floors, ceilings and fire-rated walls.
If energy-saving devices and electrical generators make sense for a building
that has $500,000 in subsidies, do the same costly materials make sense for a
conventional apartment building? Opinions vary.
Even with rebates, the added cost of the conservation and energy-generating
equipment may be a hard sell for developers of market-rate apartment units.
Such developers often sell their projects shortly after completion and might
not be able to fetch a higher price for energy-efficient buildings.
For a nonprofit like Community Corp., which plans to retain ownership of its
buildings for 80 years, the added front-end cost could be worthwhile because
the equipment will hold down energy costs for low-income tenants for years.

California ; Metro Desk
Officials Oppose Utility Choice Power: They say users leaving traditional
firms could jeopardize state's repayment of $50 billion in energy purchases.
TIM REITERMAN
?
06/26/2001
Los Angeles Times
Home Edition
Page B-1
Copyright 2001 / The Times Mirror Company
Consumer choice was a mantra when California moved in 1996 to restructure its
electricity industry. But the right of utility customers to shop around for
power is falling victim to the state's own strategy to drag itself from the
energy debacle.
Warning of a "spiral of declining customers and rising power rates," top
state officials are calling for swift action to curtail the freedom of
utility patrons to buy from alternative electricity providers.
They fear that California 's ability to pay for nearly $50 billion in past
and future electricity purchases would be jeopardized unless regulators or
legislators suspend or restrict the state's so-called direct-access program.
A flight of customers from the traditional utilities, the officials say,
would saddle the remaining businesses and consumers with paying off an unfair
share of those billions.
Under direct access, thousands of utility customers--ranging from big
commercial and industrial users to environmentally aware residential
consumers who wanted "green power"--signed up with companies promising lower
prices, better service or the security of long-term contracts.
But the energy crisis changed all that.
In January, the state's Department of Water Resources became the major
electricity purchaser for most Californians, as skyrocketing wholesale prices
put Pacific Gas & Electric Co. and Southern California Edison deeply into
debt and many suppliers refused to sell to them. The same legislation that
authorized the department's purchases called on the California Public
Utilities Commission to suspend direct access until the state stops buying
power--which could be almost two decades under some of the long-term
contracts the state has signed with suppliers.
The commission is poised to vote Thursday on a proposal to suspend direct
access by July 1, and it is expected to pass. Bills in the Legislature would
resurrect the program while requiring new customers to pay "exit fees"
designed to protect the state's planned $13.4-billion bond sale for
electricity purchases, but the proposals have been mired in negotiations.
In any case, state officials say they can ill afford to lose big commercial
and industrial users as utility customers help pay off the state's current
$8-billion power tab and more than $40 billion in long-term power contracts.
"If such customers are permitted to 'exit the system' without [paying] their
share of costs incurred by DWR . . . the burden of covering debt service
payments will fall on a smaller base of remaining customers, significantly
and unfairly increasing their power rates," said a June 12 memo from state
Treasurer Phil Angelides and the heads of the Finance and Water Resources
departments to the PUC and the Legislature.
"There is a concern that as power rates paid by the remaining customers would
rise, customers would have additional economic incentive to abandon DWR
power, creating a spiral of declining customers and rising power rates," the
memo said.
Statewide, the total number of direct-access customers has fallen from a peak
of more than 200,000 to about 88,000 in mid-May. Figures from the California
Energy Commission show that these customers--including hotel and hospital
chains, factories, farms, the state's university systems and about 78,000
residences--accounted for about 2.1% of the power consumed in California .
The level of participation by residential customers was 1.1%--about a third
as high as for large commercial and industrial customers.
The penetration rates were much higher early this year, when about 13% of
industrial users had direct-access contracts. But many providers sent their
customers back to Edison, PG&E and San Diego Gas & Electric, as wholesale
energy costs soared and they could not compete with the utilities, whose
rates were frozen by the 1996 deregulation law.
One provider, AES NewEnergy, claims 60 to 70 customers, ranging from
mom-and-pop stores to grocery chains. About a year ago, the company had 150
to 200 customers.
"Direct access is at the heart of the concept of competition and choice,"
said Aaron Thomas, the company's manager of government relations. "The [PUC]
order stinks, and it is not necessary to put a stake in the heart of direct
access to float a bond."
Said Rick Counihan, a spokesman for Green Mountain Energy: "Unless we see a
legislative solution, direct access is dead. We're being driven out of
California ."
Green Mountain, a Vermont-based company that sells power from renewable
sources, has seen its California customer base shrink from 60,000 to 7,000,
all in San Diego and Orange counties.
Although they have never fled en masse to direct access, many businesses and
institutions want to maintain direct access as an option, especially because
it is uncertain whether the state's power contracts will prove to be a
bargain or a bust in the long run.
Bill Dombrowski, president of the California Retailers Assn., representing
more than 50 large companies, said it is important to maintain direct access
as an option because "the market is in a shambles."
"At its peak, before the market was dysfunctional, you saw 5% to 10%
reductions [in electricity rates] compared to local utilities, which is
significant dollars when you are talking about larger companies," he said.
Like other proponents, Dombrowski maintains that the fears expressed by state
officials and Wall Street bond underwriters are exaggerated.
"Realistically, you will not see a wave of people going to direct access," he
said.
The utilities commission measure, which would halt new direct-access
enrollments, was put off until this week in hopes that a solution could be
worked out in Sacramento. PUC Commissioner Jeff Brown, one of three
appointees of Gov. Gray Davis on the five-member commission, said that, like
the governor, he favors direct access on philosophical grounds but sees no
way to avoid suspending the program.
"We are tied up in the realities of the bond sale," he said. "If the
Legislature wants to do something in the future, fine."
Commissioner Richard Bilas, another supporter of direct access, acknowledges
that "it could at the margins jeopardize the bond sale." But direct access,
he said, "is what restructuring was about in the first place. . . . Without
it, you no longer have restructuring."
Advocates of direct access remain hopeful that a legislative solution could
balance the desires of the business community and the bond underwriters. A
bill by state Sen. Debra Bowen (D-Marina del Rey) would require exit fees and
other provisions sought by state finance officials.

Billions of dollars at stake as power talks begin
MARK SHERMAN, Associated Press Writer
Tuesday, June 26, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/06/26/financ
ial0338EDT0014.DTL
(06-26) 00:38 PDT WASHINGTON (AP) --
Energy users and providers are billions of dollars apart in their estimates
of how much the power crisis in the Western states has cost. The federal
official overseeing confidential settlement talks wants them to come to terms
quickly.
With just two weeks to reach agreement, Federal Energy Regulatory Commission
chief administrative law judge Curtis L. Wagner said he wants all sides to
start using realistic numbers when they meet Tuesday for the second day of
negotiations.
"Now we're getting ready to get down to brass tacks," Wagner said Monday,
after the first day of talks.
Led by California, Western states say power-generating companies overcharged
them by $15 billion in the past year.
Michael Kahn, California's chief negotiator, said the $9 billion in refunds
his state claims it is owed should be the first order of business. "We want
our refunds. We want them now," said Kahn, chairman of the California
Independent System Operator, which manages the state's power grid.
The states claim that the companies unfairly drove up prices to take
advantage of a power shortage. Prices frequently surpassed $300 a
megawatt-hour, 10 times what they were in 1999. One megawatt is enough to
power about 750 homes.
The power companies argue that the charges were justified. In some cases,
older, more costly power plants were pressed into service to deal with the
high demand and tight supply.
Wagner attributed the states' claims to the rhetorical flourishes that often
accompany the start of negotiations. "Everybody has to stick to their guns
for a while," he said.
The judge, who is playing a mediator's role in the negotiations, said he has
seen nothing to change his previously stated view that refunds in any
settlement probably would not exceed $2.5 billion.
He cautioned all sides that a brokered settlement would be preferable to a
plan he would recommend to federal regulators should talks fail.
More than 150 people representing about six dozen entities gathered in a
government hearing room for negotiations. The talks were one result of a
federal order last week extending price controls on spot power sales in
California and imposing limits in 10 other Western states.
Wagner laid out several issues negotiators will have to tackle, including how
much generators are owed for power they supplied to California without
getting paid.
The size of the refunds and the unpaid bills "must be, both ways, resolved at
the outset to put everyone on the same playing field," Wagner said. Any
settlement probably would also have to answer whether the generators should
have immunity from existing and future lawsuits and prosecution, he said.
The parties also have to try to reach agreement on additional long-term power
contracts, which would reduce the amount of power California would have to
purchase on the volatile spot market.
The attendees included representatives from California and a dozen city and
county governments, investor-owned and municipal utilities, power generators
and natural gas companies.
On the Net: Federal Energy Regulatory Commission: www.ferc.gov/
,2001 Associated Press ?

Compromise urged in electricity refund talks
Zachary Coile, Chronicle Washington Bureau
Tuesday, June 26, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/26/M
N122522.DTL
Washington -- With armies of lawyers on each side, California officials and
representatives of the nation's power generators began the first day of
federally ordered settlement talks yesterday far apart on the issue of
electricity refunds.
California officials, including attorneys for the investor-owned utilities,
stuck to their claim that the state was owed nearly $9 billion in alleged
overcharges by the generators.
But electricity suppliers were equally adamant in their opposition to
refunds, arguing the prices they charged were legitimate. Suppliers are
demanding payment for billions of dollars they are owed for electricity
already sold into the state.
The mediator in the talks, veteran Federal Energy Regulatory Commission
administrative law Judge Curtis L. Wagner Jr., warned both sides they would
have to compromise -- or accept a settlement imposed by federal regulators.
"The time to put California's past energy problems to rest and structure a
new arrangement for California's energy future is now," Wagner said. "We can
do it if we try."
The difficulty of the task was made clear when the judge asked those in the
hearing room yesterday to stand and identify themselves. About 140 people --
nearly all lawyers -- stood to declare which state, city, power exchange or
generator they represented.
In addition to a host of energy firms, other Western states are involved in
the talks. Officials in Washington and Oregon say they may ask for up to $6
billion in refunds.
Wagner opened the talks by reading a letter from new FERC Commissioners
Patrick Wood and Nora Mead Brownell urging both sides to compromise.
"Parties must only focus on what they absolutely need, not what they want,"
the statement read. "This is not the place to debate the shopping list, nor
is it the place to assign blame."
If the parties can't settle the money fight in 15 days, Wagner will have
seven days to recommend action to FERC's five commissioners.
"I can tell you now that you are far better off to work out the refund issue
in these settlement proceedings than to have me recommend an answer to the
commission," Wagner said.
As the talks started in Washington, Wood and Brownell met yesterday in
Sacramento with Gov. Gray Davis, legislative leaders and other groups
involved in solving the energy crisis.
Davis said in a statement that he was more encouraged by FERC's actions
recently since the two joined the regulatory body.
"In a refreshing change . . . these commissioners offered a problem-solving
approach in resolving California's energy challenge," Davis said.
Wood expressed optimism the settlement talks would be fruitful.
"I think it is far better to settle than to stretch out through litigation,
even if the state were to ultimately prevail," he said. "This is really
(about) businesspeople who need to re-establish a business relationship that
has been poisoned."
Although the divide between California officials and the generators is vast,
some have faith in the mediator, a 72-year-old judge with a track record of
reaching settlements in difficult cases.
"He's a miracle worker," said FERC commissioner William Massey. "He's very
good at persuading parties that it's in their best interests to settle rather
than proceed" with lawsuits.
Wagner set the tone yesterday by ordering reporters out of the hearing room
after half an hour explaining the ground rules. And Wagner warned
participants to keep the discussions confidential.
"I would hate to read something in the business section tomorrow that
somebody said here today," Wagner said.
Michael Kahn, chairman of California's Independent System Operator, said the
state would hold firm to its request for $8.9 billion in refunds. Any refunds
would go to the electricity buyers -- the utilities and the Department of
Water Resources, which has bought energy on behalf of the state since
January.
But to suppliers, even the word "refund" is an unacceptable term.
"Certainly, you will not find a supplier who will agree that they have been
overcharging anyone in California, so clearly any refund obligation will be
contested," said Mark Stultz, a vice president of the Electric Power Supply
Association, which represents the generators. "The suppliers will argue the
charges were appropriate for the market conditions."
State officials may face difficulty recovering the full amount, based on
electricity sales from May 2000 to May 2001. Under FERC rules, overcharges
can only be authorized after a formal investigation is ordered, which began
Oct. 2,
2000.
"There is no way that we're going to do anything to compromise those claims,
" Kahn said. "That includes last summer, when San Diegans were terribly
overcharged. That includes last summer, when there were no credit problems,
and the gas situation was not anywhere near as severe as it was later in the
year, and still there were hideous (electricity) prices."

POWER ISSUES
These are some of the items administrative law Judge Curtis L. Wagner Jr.
expects to tackle during settlement talks between Western state officials and
power generators:
-- -- California's claim that the generators overcharged the state by nearly
$9 billion for electricity.
-- Generators' claims of overdue payments, estimated at several billion
dollars, due them from PG&E and other utilities.
-- Long-term power contracts, which would reduce the amount of power
California must purchase on the volatile spot market.
-- Ensuring a creditworthy party to pay for power.
-- Natural gas prices and pipeline capacity, particularly in Southern
California.
-- PG&E's bankruptcy proceedings. Source: Chronicle staff and news services
Chronicle staff writer Lynda Gledhill contributed to this report from
Sacramento. / E-mail Zachary Coile at zcoile@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 3

Developments in California's energy crisis
The Associated Press
Tuesday, June 26, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/06/26/state1
039EDT0149.DTL
(06-26) 07:39 PDT (AP) --
Developments in California's energy crisis:
TUESDAY:
* No power alerts Tuesday as electricity reserves stay above 7 percent.
MONDAY:
* Gov. Gray Davis meets with three former energy company employees he calls
"heroes" for testifying that Duke Energy reduced power production at times
when the state needed it most, charges the Charlotte, N.C.-based company
denies.
* A Federal Energy Regulatory Commission hearing officer begins attempting to
negotiate a settlement between the state and energy producers over the $9
billion Davis says the state is owed for overcharges.
* FERC commissioners Pat Wood and Nora Brownell meet with Davis and attend
California Energy Commission meeting.
* The Senate, by a 34-0 vote, gives final approval to a resolution asking
Congress to allow states to extend daylight-saving time to the full year to
save energy. The resolution by Sen. Betty Karnette, D-Long Beach, will be
sent to Congress and President Bush.
* A bill to give customers a one-month schedule of when they might be
vulnerable to rolling blackouts is rejected by the Assembly Energy Costs and
Availability Committee.
* In a pre-emptive strike against rolling blackouts, Azusa's city-owned
utility encourages industries to shut down before power supplies get tight.
* No power alerts Monday as electricity reserves stay above 7 percent.
* Edison International stock drops 41 cents to $11.57. PG&E Corp. falls 25
cents to $11.70. Sempra Energy rises 19 cents to $26.94.
WHAT'S NEXT:
* Three Senate committees plan hearings on Davis' proposal to aid financially
strapped Southern California Edison: Natural Resources Committee Tuesday,
Energy Committee Wednesday and Judiciary Thursday.
* Senate Select Committee to Investigate Price Manipulation sets a Thursday
deadline for power generators to comply with document subpoenas or face
contempt citations.
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
& 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.
Track the state's blackout warnings on the Web at
www.caiso.com/SystemStatus.html.
,2001 Associated Press ?

News briefs on California's power crisis

Tuesday, June 26, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/06/26/state0
539EDT0120.DTL
(06-26) 02:39 PDT TEMECULA, Calif. (AP) --
Residents who live along a proposed power line through southwestern Riverside
County are infuriated that San Diego Gas & Electric Co. officials would step
foot on their property to conduct land surveys without asking first.
The company recently mailed letters to residents who may be affected by the
proposed 31-mile power line that will connect its grid to a unit operated by
Southern California Edison. The letter informed residents that crews would be
conducting the surveys over the next few months.
Company officials said they are protected by law to survey the land. But
opponents said it is unclear if the company has access to the property
because legal questions have been raised about the utility's eminent domain
powers.
Some residents have threatened to call police if SDG&E officials come on
their property.
"I was furious," said Eve Brehm, 73, who lives in the affected area. "They
haven't bought it yet (her land) and they don't have my permission to be out
there."
Company officials said the letters are giving residents proper notification
for work that needs to be done.
"We are doing everything we can to avoid any inconvenience to property
owners," said SDG&E spokeswoman Jacqueline Howells. "There is no legal
requirement for notification, but we sent the letters out as a courtesy to
keep the property owners informed."
SAN CLEMENTE, Calif. (AP) -- A transformer explosion at the San Onofre
Nuclear Generating Station caused a fire outside its twin reactors but no one
was injured, said a plant spokesman.
Sunday's explosion posed no radiation danger to people, according to plant
spokesman Ray Golden, but it did scare a few motorists who were driving by
the reactors and saw a fireball rise 50 feet into the air.
"You don't actually know how things are hooked up, so you don't want to hang
around," said Burt Engel, who was driving from San Diego to Los Angeles
County. "We moved north pretty quickly."
The explosion occurred shortly after 11 a.m. and was followed by a fire that
lasted about 40 minutes. The transformer was destroyed but no other equipment
was damaged, Golden said. The twin reactors continued to operate without
interruption.
The explosion sent shards of aluminum and ceramic debris skyward, some of it
landing on Old Highway 101. None of the debris fell on nearby Interstate 5,
authorities said.
The transformer was one of several dozen that is used to reduce the voltage
of a sample of outgoing electricity. The explosion was the fourth accident at
the plant this year.
A faulty circuit breaker caused a fire in February that cut electricity to an
oil pump which lubricates steam turbines. The accident forced the closure of
one of its generators for four months. Repair work cost nearly $50 million.
,2001 Associated Press ?

The haggling over refunds is under way
Posted at 9:40 p.m. PDT Monday, June 25, 2001
BY JIM PUZZANGHERA

Mercury News

WASHINGTON -- The warring parties in the California electricity crisis
funneled into a room here Monday morning to try to cut through the animosity
and agree how much in refunds the state will get from energy suppliers.
Billions of dollars are at stake as legal teams from California, its
utilities and dozens of power suppliers try to negotiate a settlement by July
10. The Federal Energy Regulatory Commission set up the settlement conference
to resolve California's claims that energy suppliers have overcharged the
state $8.9 billion for power since last spring.
The commission has ordered about $124 million in refunds for a small portion
of that time. Power companies balk at the suggestion they overcharged, saying
it is they who are owed billions by state utilities that haven't paid their
bills for electricity purchases.
Deadlock warning
If the parties can't settle the dispute during the talks, Judge Curtis
Wagner, a straight-talking, 72-year-old administrative law judge, will
recommend a solution to the commission.
``I can tell you now that you're far better off to work out the refund issues
in these settlement proceedings than to have me recommend an answer to the
commission,'' Wagner warned the 150 participants before the confidential
talks began. ``The time to put California's past energy problems to rest and
structure a new arrangement for California's energy future is now. We can do
it if we try.''
Early indications were that a settlement will be difficult, although state
and federal officials in Sacramento talked with optimism about a new level of
cooperation.
But at the meeting in Washington, the head of California's team gave no
ground Monday, reiterating the state's position that it wants all of the $8.9
billion Gov. Gray Davis demanded during congressional testimony last week.
Michael Kahn, chairman of the state's Independent System Operator, said that
all the parties in California -- the governor, the attorney general, the ISO,
the Public Utilities Commission and the three investor-owned utilities -- are
presenting a unified front.
``We are all together along with representatives from the Legislature,'' Kahn
said, ``in saying the same thing to FERC and saying the same thing to the
generators: We want our refunds. We want them now, and we want that to be the
first order of business.''
Kahn said the $8.9 billion figure is bolstered by initial estimates by the
state of overcharges if a new price-limit formula approved by the commission
last week had been in effect since May 2000. The total is ``an extremely
conservative estimate,'' he said, and the state will ask for ``a lot more
money'' if the issue is referred to the commission for action, or if the
whole dispute goes to court. The total amount of electricity purchases by
California and its utilities during that 13-month period was $43.8 billion.
But how far back the state could seek refunds is one of several issues Wagner
said must be determined in the settlement talks. The commission has said it
has authority to order refunds only from last October, though everything is
subject to negotiations. Wagner said last week he believes the amount
suppliers owe the state is about $2.5 billion.
The state estimates it was overcharged $2.94 billion from May 2000 to
September 2000, according to a confidential ISO breakdown obtained by the
Mercury News. The breakdown of alleged overcharges by 44 suppliers goes only
through February 2001, when the state estimated overcharges at $6.8 billion,
a figure recently updated through the end of May to $8.9 billion.
For the whole period from May 2000 to February 2001, the biggest
over-chargers were Williams Energy Services Corp., $861 million; Duke Energy
Trading and Marketing, $805 million; and Southern Company Energy Marketing,
$754 million.
Other concerns
Among other subjects to be negotiated are who should get refunds and immunity
for suppliers from future lawsuits for overcharges. In convening the
negotiations, FERC commissioners said they hoped many issues could be
addressed in addition to refunds, including more long-term contracts between
the state and power suppliers.
At the end of the first day of talks, Wagner said the state and some others
were digging in. In all, about 50 parties sent representatives, ranging from
energy suppliers to utilities to municipalities. Wagner admonished them all
to keep the talks confidential.
``Everybody has to stick to their guns for a while,'' he said, noting the
negotiations may have to go late into the evenings and into weekends to meet
the deadline.
In Sacramento on Monday, the newest commissioners to join FERC -- Pat Wood
and Nora Brownell -- praised California for its handling of the energy
crisis.
Wood, a Texan appointed by President Bush and expected to become the next
FERC chairman, said he had come to California to help ``patch up'' the
state's strained relationship with federal regulators.
After meeting with Davis and legislative leaders, Wood said he was ``more
hopeful today than I was at any time in the past year.''
``They are very committed to getting this energy cowboy back on the bucking
bronco,'' he said.
Davis, who has bashed Bush and federal regulators for weeks, also changed his
tone.
``From my conversations with these commissioners, it appears that FERC may
finally be poised to do its job controlling energy costs,'' he said in a
prepared statement.

Mercury News Staff Writer Dion Nissenbaum contributed to this report.

Power workers supported
Earlier testimony about deliberate manipulation of power plants is backed up
by a new group of employees.
June 26, 2001
By KIMBERLY KINDY
The Orange County Register
SACRAMENTO A second wave of former power-plant workers stepped forward Monday
to say they witnessed power merchants intentionally damage generators -
including some in Orange County - a practice they believe led to price
gouging of Californians.
The generating companies, Duke Energy and AES Corp., also denied the new
round of allegations, made by a half-dozen workers who took their stories
public or contacted legislators with offers to provide sworn testimony.
One of those speaking out Monday, a former manager at Duke's Chula Vista
plant, told The Orange County Register that he supports the testimony of
three former colleagues who Friday told a Senate committee that new parts at
the plant were destroyed, routine maintenance was neglected and generators
were unnecessarily throttled down.
Rick Connors said that unlike the three Chula Vista plant workers who
testified earlier, he was offered continued employment by Duke and cannot be
dismissed by the company as a terminated employee with an ax to grind.
"I listened to the entire hearing. I can tell you that everything they said
was the truth; nothing they said was even a stretch,'' said Connors, who has
decided to retire and become a card dealer instead of working for Duke, which
took over the plant from San Diego Gas & Electric and laid off many of his
experienced co-workers.
Connors and another new witness, Dan Davis, a former electrician at the
AES-owned Huntington Beach plant, each on Monday said they saw maintenance
schedules at their respective plants abandoned and generators constantly
turned on and off, which damaged them.
"They learned that they would operate one generator and make more money than
if they were operating three,'' said Connors.
Conners had worked at the plant 20 years before Duke took it over in 1998 and
said he was familiar with generation levels before and after the takeover.
Conners said that even though Duke dramatically cut back on how much it ran
its generators in the first year, Duke executives boasted to employees at a
company party that they had made as much money in their first year as SDG&E
had made in the previous five.
Similarly, Davis said, the generators at the AES plant in Huntington Beach
would be ramped down and quickly ramped up again.
He believes this wear and tear coupled with a lack of maintenance not only
helped create an immediate scarcity in the market but also created an
environment of constant breakdowns - which created further scarcity.
"At first I thought they were stupid,'' said Davis, who now works for the
union representing plant workers. "I had been there 10 years and I was
watching them destroy the plant. But then I saw how it made them money.
Breakdowns made them money."
Both companies vigorously denied the allegations.
"Any talk of us intentionally breaking down equipment is ludicrous,'' said Ed
Blackford, manager of the AES plant. "When our units break down, we lose
money. We have commitments and if we can't produce that electricity, we have
to go out into the market and buy it."
Duke spokesman Tom Williams said he is sure the workers saw changes in the
way the plants were operated after deregulation - but said their conclusions
of price-fixing and gouging are off base.
"It's highly offensive to us,'' said Williams. "They were seeing things from
their own viewpoint and they don't see the full picture."
Duke took out a full page ad in today's Orange County Register and other
newspapers that says the powering up and down was done at the order of the
Independent System Operator, which manages the state's power grid. Williams
acknowledged, however, that some of those orders were made by Duke itself,
but couldn't say what percentage.
The advertisement doesn't address the allegation that equipment was
intentionally mistreated or replacement parts scrapped, although Duke said
earlier that the parts were obsolete and it was more cost-efficient to order
parts as needed.
ISO spokeswoman Stephanie McCorkle said its orders to power suppliers to ramp
generators up and down are confidential and she could not verify Williams'
explanation. However, the ISO, she said, would give Duke orders to ramp up
and down no more often than every 10 minutes.
A review of three days of logs obtained by the Register showed that on more
than a dozen occasions, orders were given in two-, three- or four-minute
intervals - the so-called dramatic "yo-yoing" of the generators that some
legislators say indicates Duke was acting by itself.
Williams said the bottom line is that forced outages at the Chula Vista plant
were done under Duke's control just 1.1 percent of the time, compared to 1.8
percent under SDG&E.
Those numbers, however, are disputed. Frank Wolak, a Stanford economics
professor who oversees the ISO's market-surveillance committee, said the
forced outage numbers have only been reliable for the past six months.
"There is no independent verification of these numbers until Jan. 1, 2000,
until the governor required that they report this information every single
day,'' Wolak said. "That information isn't any good."
Wolak also said the employees are correct about the destructive results of
the constant ramping up and down, comparing it to the wear and tear on a car
that travels through a succession of city traffic lights vs. a clear freeway.
The governor Monday stood by the three former Chula Vista workers who
testified Friday, calling them "brave individuals."
"I am enormously proud of these people who would step forward, risk the
harassment and retaliation these big energy companies are known for," Davis
said just before having breakfast with the men.

Judge sets tone at energy talks
He suggests that all sides, including the state delegation, would be better
off settling.
June 26, 2001
By DENA BUNIS
The Orange County Register
WASHINGTON On the first day of talks over how to settle billions of dollars
of refund claims and other issues surrounding California's electricity
crisis, a federal energy judge gave a friendly warning to the more than 140
people in his hearing room:
"I can tell you now that you are far better off to work out the refund issue
in these settlement hearings than to have me recommend an answer to the
commission," Curtis L. Wagner, chief administrative law judge for the Federal
Energy Regulatory Commission, said Monday.
The FERC ordered a 15-day settlement conference for stakeholders in the
electricity crisis to resolve such issues as alleged generator overcharges,
how much generators still have to sell to California and the future of
long-term contracts.
The first day ended where it began:
"California wants $8.9 billion worth of refunds," Michael Kahn, chairman of
California's Independent System Operator and Gov. Gray Davis' representative
at the talks, said during a break.
Kahn and the rest of the state delegation met for 90 minutes with Wagner on
Monday afternoon. Kahn then got on a plane for California. The state has
until Wednesday to produce more information for the judge.
Wagner later met with power sellers in an effort to understand their
position, which is that the state's refund figure is laughable.
"Now we're ready to get down to brass tacks," Wagner said. The veteran energy
jurist wasn't phased by Kahn's and Davis' hard line on the $9 billion refund
figure, even though Wagner signaled last week that a couple of billion in
refunds is more likely.
"Everybody has to stick to their guns for a while," Wagner said. The judge
wouldn't say how he arrived at his refund estimate. But within Davis' $9
billion estimate is more than $4 billion that he says is owed to the state by
entities over which the FERC has no control, such as municipal power
companies. In addition, the state has calculated the $9 billion based on
alleged overcharges from May 2000 to May 2001. The FERC began calculating
overcharges in October 2001.
There's no way, Kahn said, that the state will abandon its overcharge claims
for last summer.
The first day's proceedings were largely theater. The conference started with
a statement from Wagner, including his reading of a letter from new FERC
Commissioners Patrick Wood and Nora Brownell, both of whom were in Sacramento
on Monday researching the natural-gas issue.
"This is not the place to debate the shopping list," the letter said. "Nor is
it a place to assign blame. Everyone must leave with something more than they
came in with."
Then representatives from the power sellers, the utilities, the state and
interests from throughout the West introduced themselves to each other.
After that, Wagner closed the conference and admonished all the parties not
to talk about what goes on in the closed hearing room.

Business/Financial Desk; Section C
California and Energy Providers in Talks Over Electric Fees
By JOSEPH KAHN
?
06/26/2001
The New York Times
Page 7, Column 1
c. 2001 New York Times Company
WASHINGTON, June 25 -- For the first time since the end of the Clinton
administration, California and the companies that sell it electricity sat at
the same table today to try to resolve a multibillion-dollar feud over the
state's energy bills.
California is demanding that power companies refund as much as $9 billion for
what it says were overcharges, while power companies say that the state's
nearly insolvent utilities owe them billions of dollars. City and state
officials from across the West are also participating in the negotiations.
The Federal Energy Regulatory Commission convened the talks, which are
scheduled to last up to two weeks. The sessions are the first since top
Clinton administration officials tried and failed to broker a settlement to
California 's electricity crisis in their waning days in office.
''The time to put California 's past energy problems to rest and structure a
new arrangement for California 's energy future is now,'' said Curtis Wagner,
an administrative law judge for the energy commission who is presiding over
the settlement talks.
The proceeding, which was standing-room-only on opening day, attracted scores
of people representing multiple sides in the dispute. The main participants
are electricity generating companies, electric utilities, and public
officials from state and local governments and regulatory agencies.
Mr. Wagner urged the public officials and companies involved to reach an
agreement on how much California and other states in the Western grid should
have paid for power over the last year, when California 's partly deregulated
market broke down. He said that if they failed to do so by July 10, he would
recommend a solution to the energy agency's five commissioners, who would
then have the option of imposing a settlement.
Wholesale power costs in California , which totaled $7 billion in 1999,
soared to about $27 billion last year and, by some state estimates, could
double again this year. The higher costs, which have not been fully passed
along to consumers, have rendered California 's two main utility companies
unable to pay their bills and forced the state to buy power in their place.
The opening bid by Gov. Gray Davis, who set out his views in a letter sent to
the energy commission today, is that the leading electricity generators
should refund about $9 billion that ''they have overcharged the people of the
state of California .'' Michael Kahn, chairman of the California Independent
System Operator, is leading the state delegation.
Generating companies have dismissed that figure as grossly inflated. They
acknowledge that prices are high. But they say the charges are linked to
shortages of natural gas, a crucial fuel for electricity generation, and were
set fairly in a free market.
The companies also contend that a large proportion of what they have billed
California is a credit premium justified because wobbly utilities owe them as
much as $15 billion. Reliant Energy, Duke Energy, the Williams Companies, the
Enron Corporation and the Mirant Corporation are among the major sellers of
electricity in the Western region.
The energy commission, which has the duty of determining ''just and
reasonable'' electricity prices under a New Deal-era law, long ago found that
the California market had become dysfunctional and that prices were
unjustified. But the agency has struggled to come up with a method for
determining fair rates, changing its method three times in recent months.
So far, the agency has identified about $125 million in potential
overcharges. But that number was reached using a restrictive method that the
agency has since abandoned.
Last week, the agency adopted a new price control regime that is intended to
limit price spikes throughout the West. If the controls it is using now were
retroactively applied to electricity sales made over the last year, the
generators would be asked to refund much more money. By some estimates, the
refunds could total more than $1 billion but seem likely to fall well short
of the $9 billion California is seeking.

National Desk; Section A
Cheney Withholds List of Those Who Spoke to Energy Panel
By JOSEPH KAHN
?
06/26/2001
The New York Times
Page 17, Column 1
c. 2001 New York Times Company
WASHINGTON, June 25 -- Vice President Dick Cheney has declined to identify
the people who met privately with his energy task force, raising tensions
with Congressional investigators who have repeatedly requested the
information.
The General Accounting Office, an investigative arm of Congress, sent Mr.
Cheney's office a letter late last week complaining that a month had passed
since it first submitted an inquiry about the workings of the task force. The
letter said the vice president had a legal obligation to provide the
information immediately.
Mr. Cheney's office said the letter was sent one day after it submitted 77
pages of documents to the accounting office.
''Our correspondence crossed in the mail,'' said Juleanna Glover Weiss, a
spokeswoman for Mr. Cheney.
But Ms. Weiss said the vice president had not provided the names of people,
including industry executives, who may have influenced the formation of the
Bush administration's energy policy, which was released last month.
''Our counsel and the G.A.O. will continue to talk about this,'' Ms. Weiss
said.
The energy task force Mr. Cheney headed spent several months compiling a
lengthy energy strategy that contained about 150 recommendations for
administrative and legislative actions to address what it termed an energy
crisis.
Administration officials have said that they met with a wide variety of
people concerned about energy issues, including executives of oil, natural
gas, electricity , nuclear power and energy infrastructure companies. They
have declined to provide a list of people who had access to the task force.
Some Democrats have asserted that leading Republican donors had special
access to the task force and that the energy policy is skewed toward measures
favored by major corporations. Two Democratic representatives, Henry A.
Waxman of California and John D. Dingell of Michigan, asked the accounting
office to report on the officials who served on the task force, what
information was collected by the panel, whom they met with and how much the
task force spent.
The White House provided the G.A.O. with the financial records of the task
force. But administration officials have told the investigative body that
they are not compelled to provide the names of outsiders who met with the
task force.
The accounting office's general counsel, Anthony H. Gamboa, said in a letter
to Mr. Cheney's office last week that the investigative body is entitled to
more information.
The letter warned that if the White House does not provide the full range of
information the G.A.O. is seeking, it may issue a ''demand letter,'' a more
formal request. Under the law, the White House would have 20 days to respond.
If the dispute continues, the accounting office could bring a civil action
against the administration.

Love, War and California Electricity
By Susan Lee
?
06/26/2001
The Wall Street Journal
Page A22
(Copyright (c) 2001, Dow Jones & Company, Inc.)
California 's energy crisis presents at least a dozen major policy issues,
but perhaps the most complicated question -- and the one with the least
satisfactory solution -- is who should pay for past power usage.
Specifically, who should pay wholesale electricity suppliers for juice that
was consumed after wholesale prices rose fiercely above fixed retail prices?
Between May 2000 and January 2001, before the state of California intervened,
a $14 billion gap opened up between what the suppliers charged and the
utilities could pay.
Right now, nobody is paying. To be sure, Gov. Gray Davis has issued a
memorandum of understanding in which he suggests that ratepayers would bear
part of the repayment burden in the form of a surcharge on their electricity
bills, and taxpayers would bear another part in helping fund the state's
purchase of utilities' transmission grids. But the memorandum is just a vague
promise, and is already in deep political trouble.
It isn't fair to leave power suppliers hanging; the power was used and must
be paid for. The problem is that, just as in love and war, the California
energy mess no longer has a fair solution.
There are several groups of potential payers. The No. 1 target group is
consumers, or ratepayers, on the grounds that they used the power and thus
should pay its market cost. Yet consumers demanded the amount of power they
used based on its low retail price. It's hardly fair to now go back and raise
the price retroactively. After all, if the price had been higher, consumers
would have used less of it.
A second group of potential payers are the taxpayers, on the grounds that
this is a big political and regulatory problem for the entire state of
California . Since most taxpayers are voters and since voters are ultimately
responsible for the acts of officials they elect, fairness dictates that
taxpayers ought to suffer the punishment for the botched deregulation scheme.
But this solution, too, has flaws. Although sticking taxpayers with the bill
might result in taxpayers (to the extent they are voters) throwing the
political and regulatory bums out, it doesn't locate the economic burden
efficiently. As distinct groups, taxpayers and consumers may overlap, but
they aren't identical.
And then there is a third group -- the utilities themselves -- on the grounds
that they shouldn't have been running around buying power they knew they
couldn't afford. Although this may satiate a certain blood lust (who doesn't
loathe utilities?), utilities are regulated companies and operate under
regulatory constraints and imperatives. Accordingly, they bought power on
behalf of ratepayers and they bought it like mad until they went bankrupt.
Too, it might be argued that shareholders have already "paid" -- shares of
Pacific Gas & Electric and Southern California Edison have lost 50% to 60% of
their value since the crisis began.
There is one other group of sitting ducks, the suppliers, on the grounds that
they are, in the words of Gov. Davis, pirates and marauders who profited from
California 's crisis. But aside from basic questions of equity, suppliers
have already paid a price in the form of (still mounting) legal bills to
defend themselves from charges of profiteering, as well as in the lost
opportunity to deploy the money owed to them. Moreover, suppliers already can
be expected to bear some of the payment burden since Mr. Davis has indicated
they will not be repaid dollar for dollar,
Finally, there is the group who is most at fault but the least likely to
suffer -- the regulators and politicians -- on the grounds that they pretty
much created the mess and they surely haven't moved to clean it up.
Regulators, most pointedly, because they refused to let the utilities hedge
their purchases of electricity when they pleaded to do so in 1999.
Politicians, in particular the governor, because they dithered for over a
year, preferring to blame the problem on someone else. Although putting this
group out of work might be the most satisfying civic outcome, the solution is
a flop if financial restitution is the goal.
The latest, most popular approach to solving the mess is to look at the
transfer of wealth, required in any case, that would take place under each
payment scenario. This is what some of California 's politicians mean when
they complain that full restitution means transferring $14 billion from the
state of California to the evil out-of-state power suppliers. But, as Irwin
Stelzer, economist at the Hudson Institute, points out, there is a long
history of wealth transfers to tote up.
Initially, when the botched deregulation plan was agreed to several years
ago, it involved a transfer of wealth from ratepayers to shareholders. That
is, the utilities were concerned about making back their so-called stranded
costs, mostly from overbudget nuclear power plants. Those stranded costs were
to be paid by fixing, or freezing, rates at a level that would provide "pay
back" to the utilities for their nuclear construction. However, when
wholesale prices shot up a year ago, the utilities (and their shareholders)
were caught paying much more money for power than the rates they were allowed
to charge. And so the transfer of wealth reversed itself -- shareholders
subsidized ratepayers.
Now, if Mr. Davis's memorandum of understanding becomes operative, the
transfer of wealth changes again. Ratepayers will get socked by a surcharge
on their electricity bills and taxpayers by the state's purchase of
transmission lines. Taxpayers might also get hit if the bond issue goes off
as planned in August and, as expected, erodes California 's credit quality.
That erosion would mean that all state agencies that issue bonds would be
required to pay higher interest rates. (In fact, California 's bond rating
has already been downgraded by two major rating agencies.)
Simply put, looking at the transfers of wealth doesn't yield a clear-cut or
fair solution to the payment problem either.
All this leaves politics to dictate the answer, and the shape of it is
already apparent. Suppliers, ratepayers, taxpayers and shareholders will bear
the cost while the politicians and regulators evade the consequences. In
short, the unfairness of love and war doesn't hold a candle to politics in
California .
---
Ms. Lee is a member of the Journal's editorial board.


Indiginet Inc.(Stock Symbol:IGTT)

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Respectfully,