Miyung,

You seem to be finding these okay by yourself so I guess I don't need to be
forwarding the articles I find to you anymore?
I don't mind doing it, but I can't see duplicating effort, either! :--)
Either way...let me know,
Thanks!
Joseph

Miyung Buster@ENRON_DEVELOPMENT
04/25/2001 08:25 AM
To: Ann M Schmidt/Corp/Enron@ENRON, Bryan Seyfried/LON/ECT@ECT,
dg27@pacbell.net, Elizabeth Linnell/NA/Enron@Enron, filuntz@aol.com, James D
Steffes/NA/Enron@Enron, Janet Butler/ET&S/Enron@ENRON, Jeannie
Mandelker/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron, Joe
Hartsoe/Corp/Enron@ENRON, John Neslage/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT,
John Sherriff/LON/ECT@ECT, Joseph Alamo/NA/Enron@Enron, Karen
Denne/Corp/Enron@ENRON, Lysa Akin/PDX/ECT@ECT, Margaret
Carson/Corp/Enron@ENRON, Mark Palmer/Corp/Enron@ENRON, Mark
Schroeder/Enron@EnronXGate, Markus Fiala/LON/ECT@ECT, Michael R
Brown/LON/ECT@ECT, Mike Dahlke/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Mona L
Petrochko/NA/Enron@Enron, Nicholas O'Day/AP/Enron@Enron, Peggy
Mahoney/HOU/EES@EES, Peter Styles/LON/ECT@ECT, Richard
Shapiro/NA/Enron@Enron, Rob Bradley/Corp/Enron@ENRON, Sandra
McCubbin/NA/Enron@Enron, Shelley Corman/ET&S/Enron@ENRON, Stella
Chan/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Steven J Kean/NA/Enron@Enron, Susan
J Mara/NA/Enron@Enron, Mike Roan/ENRON@enronXgate, Alex
Parsons/EU/Enron@Enron, Andrew Morrison/LON/ECT@ECT, lipsen@cisco.com, Janel
Guerrero/Corp/Enron@Enron, Shirley A Hudler/HOU/ECT@ECT, Kathleen
Sullivan/NA/Enron@ENRON, Tom Briggs/NA/Enron@Enron, Linda
Robertson/NA/Enron@ENRON, Lora Sullivan/Corp/Enron@ENRON, Jennifer
Thome/NA/Enron@Enron, jkradin@marathon-com.com,
rlichtenstein@marathon-com.com, syamane@marathon-com.com,
ken@kdscommunications.com, hgovenar@govadv.com, sgovenar@govadv.com,
bhansen@lhom.com, Carin Nersesian/NA/Enron@Enron
cc:

Subject: Energy Issues

Please see the following articles:

Sac Bee, Wed, 4/25:  "State's credit takes hit"

Sac Bee, Wed, 4/25:  "Top energy adviser to quit as Davis pushes for plants"

Sac Bee, Wed, 4/25:  "Senators offer bill to put a lid on power prices: Sen.
Dianne
Feinstein says there's a good chance the proposal can get out of committee"

Sac Bee, Wed, 4/25:  "Energy price gouging might end up felony"

Sac Bee, Wed, 4/25:  "Dan Walters: It's time for politicians to be honest
about the energy crisis"

SD Union, Wed, 4/25: "Bond-rating agency delivers reprimand, downgrade"

SD Union, Wed, 4/25:  "FERC to weigh limited curbs on electricity prices"

SD Union, Tues, 4/24:  "Grid officials declare a Stage 2 alert"

SD Union (AP), Tues, 4/24:  "Top credit agency lowers California's bond
rating"

LA Times,Wed, 4/25:  "State's Bond Rating Downgraded to A+"

LA Times, Wed, 4/25:  "Price Controls Spark Deja Vu"

LA Times, Wed, 4/25:  "Davis Names Executive to Speed Construction of Power
Plants in State"

LA Times, Wed, 4/25:  "Power Plant Emits Tons of Fumes"

LA Times,Wed, 4/25:  "Power Plant Plan Worries Neighbors"

SF Chron, Wed, 4/25:  "Federal plan called 'too little, too late'
Limited price control seen as step in right direction, but officials renew
call for price ceiling"

SF Chron, Wed, 4/25:  "S&P lowers California's bond rating
First cut since '94 could cost taxpayers millions"

SF Chron, Wed, 4/25:  "Richard Sklar
Ex-Muni boss becomes energy czar
Davis' pick to oversee power plant construction"

SF Chron (AP), Wed, 4/25:  "Will price caps deter investment, as federal
regulators say?"

SF Chron (AP), Wed, 4/25:  "Credit agency cites power troubles; lowers
state's bond rating"
SF Chron (AP), Wed, 4/25:  "S&P downgrades California's bonds citing energy
troubles"

Mercury News, Wed, 4/25:  "State bond rating lowered"

Mercury News, Wed, 4/25:  "Q&A with Gov. Gray Davis on energy issues"
(Opinions/Commentary)
Mercury News (AP), Wed, 4/25:  "Davis: Power surplus by 2003"

Mercury News (AP), Wed, 4/25:  "Great America to avoid blackouts"

OC Register, Wed, 4/25:  "State's bond rating is lowered
The energy crisis brings an A+ designation, which likely will mean higher
borrowing costs"

OC Register, Wed, 4/25: "Fire stokes wholesale gas cost"

Individual.com (Business wire), Wed, 4/25:  "Power Companies and Regulators
Must Take
Steps To Avoid Spread of California Power Virus/ Andersen Analysis"

Individual.com(Business wire), Wed, 4/25:  "Soaring Temperatures Produce Call
for Conservation;
California ISO Also Announces New Outage Notification System and On-call
Number"
------------------------------------------------------------------------------
---------------------------------------------------------------------------

State's credit takes hit
By Dale Kasler and John Hill
Bee Staff Writers
(Published April 25, 2001)
Alarmed by the drain on California's treasury from more than $5 billion of
electricity purchases, a leading Wall Street credit agency lowered its rating
on state bonds Tuesday.
Standard & Poor's downgraded California's credit rating by two notches, a
move that will increase the state's borrowing costs and illustrates a growing
fear that the state's power expenditures could mushroom during a summer of
blackouts and price spikes.
Although the state remains creditworthy, S&P said it has less confidence in
California's ability to repay its debts. It said the state could be
downgraded further if electricity purchases spiral out of control and the
economy suffers because of blackouts.
"This reflects the mounting uncertainty and the cost to the state of the
power purchases," said S&P analyst Steven Zimmermann. "The state is still
strong -- it's just not as strong going forward."
Bond ratings are a benchmark of a state's finances, and California officials
have been proud of their ability to restore the state's ratings since they
bottomed out during the recession and budget deficits of the mid-1990s. S&P's
downgrade is the first for California since July 1994 and comes as a slowdown
in the high-tech industry adds to the budgetary anxiety caused by electricity
costs.
Still, Gov. Gray Davis' office downplayed the significance of S&P's decision.
"California's economy is still fundamentally strong, period," said Davis
spokesman Roger Salazar. "We expect that in 2001 California will continue to
lead the nation in economic growth and job creation."
S&P lowered California from "AA" to "A-plus" status. That means California's
debt-payment ability has been reduced from "very strong" to "still strong"
but "somewhat more susceptible to the adverse effects of the changes in
circumstances and economic conditions."
While it won't directly hamper Davis' plan for solving the energy crisis, the
downgrade increases the pressure on Davis to issue $10 billion to $15 billion
worth of bonds this summer as part of his rescue package.
The bonds are intended to replenish the state treasury as well as finance
future power purchases. Since mid-January the state has committed $5.7
billion to buy electricity for troubled Pacific Gas and Electric Co. and
Southern California Edison. The commitment has chewed up a significant
portion of a budget surplus estimated by state Treasurer Phil Angelides at
nearly $6 billion; Davis and other state officials have pegged the surplus at
$8 billion.
Either way, it's clear that the power expenditures have left Wall Street and
many state officials nervous. S&P and other rating agencies have had
California on a ratings "watch" for some time, signifying that a downgrade
was possible.
"The fact is that the state's credit rating and financial strength will
continue to be in jeopardy until the state's general fund is repaid for
energy costs," said Angelides, who's responsible for selling the bonds.
"We have to get the general fund out of the business of purchasing energy.
(The budgetary drain) will begin to affect very dramatically the ability of
the state to provide for core programs, from education to health care to
public safety."
Angelides spent much of the day urging legislators to pass legislation to get
the bond offering rolling.
The Legislature already authorized the bonds, but Angelides said it must do
so again because PG&E and Edison are challenging the formula the state has
developed for bond repayment. The bond will be repaid with money from a rate
hike passed by state regulators, but PG&E and Edison say the repayment
formula will siphon too much money from their coffers.
Angelides said lawmakers must quickly pass the new bill -- which requires a
two-thirds majority -- or he might miss a make-or-break May 8 deadline for
closing on a crucial $4.1 billion bridge loan. That loan is designed to tide
the state over until the bonds are sold later this summer. But the lenders
won't fork over the funds until they're assured the bonds will be sold,
because the state will use the bond proceeds in part to pay off that loan, he
said.
Ironically, the sale of those bonds won't be hurt by the S&P downgrade
because customer revenue instead of taxpayer dollars are being used to pay
them off, analysts said.
"What's important for the bonds is how the (utility) rates are structured to
pay them off," said analyst Susan Abbott of Moody's Inc. in New York.
But the downgrade will raise the interest rate on a host of other bonds
issued by the state in the coming months. The likely increase is as much as
one-quarter of 1 percent, said chief economist Ted Gibson of the state
Department of Finance.
With the state authorized to sell $12 billion worth of general obligation
bonds, the downgrade could add $50 million to $100 million in borrowing costs
over the life of those bonds, Angelides said.
The S&P action also could raise a red flag to anyone thinking of investing in
a public or private-sector project in California.
It "will create perception issues about who we are and where we are in terms
of the economy of the state," Angelides said. "The real issue here is the
reputational damage to the state of California."
The two other leading credit agencies, Moody's and Fitch Investors Service,
still have California on a credit watch but haven't issued downgrades.
S&P acted the same day the Independent System Operator, which manages
California's power grid, declared a Stage 2 power alert. Warm weather and the
unexpected shutdown of two key power plants caused electricity reserves to
fall below 5 percent.

The Bee's Dale Kasler can be reached at (916) 321-1066 or dkasler@sacbee.com.
Bee Deputy Capitol Bureau Chief Dan Smith contributed to this report.
------------------------------------------------------------------------------
------------------------
Top energy adviser to quit as Davis pushes for plants

Bee Capitol Bureau
(Published April 25, 2001)
John Stevens, Gov. Gray Davis' staff director and top energy adviser, is
leaving the governor's office at the end of the week, Davis announced
Tuesday.
Stevens, of Carmichael, joined the administration a year ago as staff
director after working 13 years as a top staffer in the Legislature,
including a stint as chief of staff to former Assembly Speaker Antonio
Villaraigosa.
He is the second top Davis adviser to leave in the past two weeks as the
Democratic governor struggles to deal with California's energy woes.
Like Phil Trounstine, the governor's communications director who announced
his resignation two weeks ago, Stevens said he needed more time with his
family.
"It's an immense issue," he said of the energy crisis. "I've given what I can
to it, and I need to take a break."
Davis called Stevens, 54, "one of the most dedicated and loyal people that
I've ever had working for me," but acknowledged long hours and intensity took
its toll.
"This is tough work. This wears people out," Davis said. "He's so self-driven
that he needs a break, but I venture a guess that down the road, he'll be
willing to come back and help us in some meaningful way on this energy
situation."
Davis also announced the appointment of Richard Sklar to head a Generation
Implementation Task Force intended to speed up permitting and constructing
power plants.
Sklar was the Clinton administration's representative in southeast Europe
helping to rebuild war-torn Bosnia and Kosovo.
------------------------------------------------------------------------------
------------------------
Senators offer bill to put a lid on power prices: Sen. Dianne Feinstein says
there's a good chance the proposal can get out of committee.
By Les Blumenthal
Bee Washington Bureau
(Published April 25, 2001)
WASHINGTON -- West Coast senators formally introduced legislation Tuesday to
temporarily cap wholesale electric rates and expressed hope that their
proposal to ease the huge run-up in energy prices might clear the committee
and make it to a vote on the Senate floor.
"I think we are very close to having the votes in committee," Sen. Dianne
Feinstein, D-Calif., said of the Energy and Natural Resources Committee that
has jurisdiction over the bill. "I am taking nothing for granted, but the
committee is 50-50."
There are 11 Democrats and 11 Republicans on the committee, including
Feinstein and the other primary sponsor of the bill, Oregon Sen. Gordon
Smith.
Smith, a Republican, is the swing vote.
Feinstein said the committee chairman, Sen. Frank Murkowski, R-Alaska, has
shown an increasing willingness to help her and Smith move the legislation,
though some differences remain.
"He (Murkowski) has told me he'd like to help," Feinstein said. "I think we
are very close to a markup and this could move quickly."
Murkowski did not rule out price caps but said he thought the bill sacrificed
long-term solutions for short-term gains.
"I have concerns about the proposal put forward today and the impact it may
have in distorting the market," he said. "It is time to address the
underlying causes -- not just the symptoms."
Feinstein's comments came at a news conference during which she, Smith,
Washington state Democratic Sens. Patty Murray and Maria Cantwell, and New
Mexico Sen. Jeff Bingaman, the ranking Democrat on the Senate Energy
Committee, unveiled details of the bill and criticized the Bush
administration and federal regulators for failing to take action to cap
rates.
If approved by Congress and signed by President Bush, the bill would give the
Federal Energy Regulatory Commission 60 days to impose price caps or set up a
cost-based rate structure that would allow electricity generators to recover
their costs and earn a fair return.
The controls would apply in 11 Western states, including California, Oregon
and Washington. Similar legislation has been introduced in the House of
Representatives.
The lawmakers said the price controls would remain in effect until March
2003, when, they said, enough new generating plants will have come on line to
overcome the West's current electricity shortage.
Under federal law, FERC has the authority to ensure wholesale rates are just
and reasonable.
Feinstein said that during a warm day this summer California may fall 2,000
megawatts short of meeting demand and on a hot day with air conditioners
cranked up, there could be a 10,000-megawatt shortfall.
Feinstein said that in 1999 California utilities paid $7 billion for
electricity, in 2000 more than $32 billion and, according to some estimates,
the price tag could reach $65 billion this year.
"There has been a very strong element of price gouging in this," Feinstein
said.
"We should not have to pass legislation to compensate for a federal agency
not doing its job," Murray said, adding that Northwest utilities were paying
the highest prices in the country for next-day delivery of wholesale power.
"This (bill) will bring the market under control until new generation comes
on line."
Cantwell, who is also a committee member, said wholesale rates have risen
11-fold over the past several months, resulting in thousands of layoffs in
the region and the shutdown of the aluminum industry.
"We cannot allow our government to sit idly by and allow a tragically flawed
and easily manipulated power market to wreak havoc on our economy and quality
of life," Cantwell said.
The Bonneville Power Administration has indicated it may have to raise its
wholesale rates by 250 percent this fall as it is forced to buy power on
expensive spot markets because a severe drought in the Pacific Northwest has
reduced electricity production at the region's vast hydropower system. BPA
supplies 45 percent of the Northwest's wholesale electricity.
Smith said that, as a Republican, he was initially reluctant to support price
control and would have preferred the market sort out its own problems.
But, he said, "Hard-nosed business practices that generate big profits are
not always good politics. It's a mistake to defend a system that some can
game to make incredible profits."
The Oregon senator said he knew his decision to sponsor the bill was not
well-received at the White House.
"I know I'm not making any friends down the street," he said. "It's important
to keep this bipartisan, and I'm not going to attack the Bush
administration."
Both Smith and Feinstein said a FERC staff proposal to cap wholesale electric
rates in California when rolling blackouts are imminent falls well short of
what's needed. FERC will consider the proposal at a meeting today.
"California is not the only state affected," said Smith. "This is not a
California problem alone."
Feinstein said the proposal was inadequate.
"I'm not sure that is the right way to go," she said. "The only reason they
are considering action is we are putting the heat on them."

The Bee's Les Blumenthal can be reached at (202) 383-0008 or
lblumenthal@mcclatchydc.com.
------------------------------------------------------------------------------
------------------------
Energy price gouging might end up felony
By Emily Bazar
Bee Capitol Bureau
(Published April 25, 2001)
Democratic lawmakers this week will unveil a proposal to make energy price
gouging a felony -- punishable by stiff fines and possible jail time -- that
could be subject to the state's controversial "three strikes" law.
The measure, sponsored by Lt. Gov. Cruz Bustamante, would punish companies
that sell electricity or natural gas in California at "unjust or unreasonable
rates."
"There is a tremendous amount of wealth that is being transferred from
California to five companies, mostly in Texas," Bustamante said. "If what
they're doing isn't illegal, it ought to be."
Though lawmakers are expected to introduce the measure Thursday, it already
has generated opposition from Republican lawmakers and constitutional
questions from legal experts.
Several aspects of the bill, AB 67x, are unresolved and could change.
But the intent will remain the same, and energy companies that take advantage
of Californians will still face significant penalties, said the bill's
author, Assemblyman Dennis Cardoza, D-Merced.
According to a draft version of the bill and some proposed amendments, a
corporation, or a person with decision-making authority at the corporation,
would be found guilty of a felony if "they collude or conspire to manipulate
the market to achieve unjust or unreasonable rates for electricity or natural
gas."
A state or federal regulatory agency -- such as the Federal Energy Regulatory
Commission -- would determine whether rates were unjust or unreasonable. If
that happened, the bill would open the door for prosecution by the state
attorney general or local district attorneys.
In addition, if found guilty, companies would be forced to pay restitution
and could face fines as high as 10 percent of their gross corporate assets.
Lawmakers are debating whether to make the felony a "three strikes" offense,
which requires 25 years to life sentences for some people convicted of three
felonies.
Though the provision was in an early draft of the bill, Cardoza said it's
"not likely" to show up in the final version.
"While I think this crime is every bit as abhorrent as going in and stealing
money from a bank, we're going to have to figure out a little bit different
way of dealing with it," he said.
Even without the three strikes provision, the bill raises certain
constitutional issues, said Clark Kelso, a professor at the McGeorge School
of Law in Sacramento.
For instance, he said, it's not clear whether the state can legally base a
fine on an out-of-state company's gross assets.
And the measure, which requires a two-thirds vote for passage, already has
generated Republican opposition.
"To the extent this bill is onerous toward power producers, it may deter them
from selling here rather than risk fines and prison," said James Fisfis, a
spokesman for the Assembly Republican Caucus. "We haven't seen the details,
but it sounds like it may be a piece of legislation that goes too far."

The Bee's Emily Bazar can be reached at (916) 326-5540 or ebazar@sacbee.com.
------------------------------------------------------------------------------
------------------------
Dan Walters: It's time for politicians to be honest about the energy crisis

(Published April 25, 2001)
Gov. Gray Davis is continuing to tell Californians that he's on top of the
state's energy crisis and, as he said at one gathering last week, "in three
years, this problem will be a distant memory." Fat chance. All major aspects
of the situation are growing worse, not better, minute by minute.
Politicians took over the crisis in January as the state's major utilities
exhausted their cash reserves and lines of credit. Davis began what he said
then would be a short-term emergency program of power purchases to keep
electrons flowing into homes and businesses.
From that moment forward, the situation has steadily deteriorated, moving
toward a three-pronged disaster: severe summer blackouts, the bankruptcy of
the utilities and sharply escalating power bills. With the bankruptcy filing
by Pacific Gas and Electric Co. and decisions by Davis and the state Public
Utilities Commission to begin ratcheting up utility rates, two of the three
negative scenarios are now in place. And everyone involved in the crisis
expects blackouts this summer as demands for power soar and supplies dwindle.
The Davis strategy, if there is one, is to continue the state's massive power
purchases while negotiating longer-term and presumably cheaper supply
contracts, encourage conservation, help utilities pay off their debts by
selling their intercity transmission system to the state and tapping
ratepayers, and build more power plants to ease the supply crunch.
Currently, the governor is touting his deal with Edison International, parent
company of Southern California Edison, to sell its portion of the power grid
and is working on a similar deal with Sempra, the parent of San Diego Gas &
and Electric. But PG&E's bankruptcy filing casts doubt on the viability of
the cash-for-grid concept, and legislators, particularly Davis' fellow
Democrats, are very skeptical of the Edison deal.
Clearly, Davis rushed into the Edison deal just three days after PG&E made
its bankruptcy filing, in hopes of erasing the political stain of the latter
action, but its provisions are being labeled a bailout by critics. It places
only a token financial burden on Edison International while guaranteeing the
profitability of its utility subsidiary by charging its customers whatever is
required to cover its costs and past debts.
Meanwhile, the state is spending -- by Davis' own account -- about $70
million a day or $2 billion-plus a month on spot power purchases, paying
roughly five times what consumers are being charged at the retail level. And
the futures market for power indicates that wholesale power prices will jump
50 percent by midsummer; higher prices and greater purchases could increase
the drain on the state treasury to as much as $5 billion a month.
State Treasurer Phil Angelides is desperately trying to arrange a bridge loan
to relieve pressure on the state's rapidly vanishing reserves, but Wall
Street is reluctant to lend without a fuller explanation of what's happening
and a specific authorization from a suspicious Legislature. Meanwhile,
bankers are sending strong signals that the state government is becoming as
poor a lending risk as the utilities.
Davis, for some reason, is unwilling to declare this situation the emergency
that it is truly becoming -- one that could take a toll on human life if
major blackouts shut down air conditioners, respirators and traffic lights.
He insists on issuing his periodic -- and wholly unrealistic -- assurances
that things will turn out all right, even declaring to reporters on Tuesday,
"We think we'll have this thing licked by the end of fall."
It's time for someone -- the governor, preferably, but someone -- to lay out
for Californians exactly what's happening, the downside financial and power
supply risks, and what's being done to deal with the looming disaster facing
this state. It's time for politicians to treat us as adults who can face
reality, not as children to be fed sugar-coated sound bites and slogans.

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

Bond-rating agency delivers reprimand, downgrade

By Ed Mendel
UNION-TRIBUNE STAFF WRITER
April 25, 2001
SACRAMENTO -- An influential Wall Street firm yesterday gave Gov. Gray Davis
and the Legislature poor marks for handling the electricity crisis,
downgrading state bonds because of the drain on the state treasury and
warning of long-term damage to the state economy.
The bad news from Standard & Poor's came as state Treasurer Phil Angelides
urged the Legislature to pass a bill this week needed to begin repaying the
state general fund with a bond of $10 billion or more.
The bond would be paid off by ratepayers over 15 years.

"From a small problem that could have been solved in a short period of time
this is escalating into a big problem," said David Hitchcock of Standard &
Poor's. "Even if they issue revenue bonds, it could stay with them for a long
period of time."
Standard & Poor's lowered its rating on state of California general
obligation bonds from AA to A+, which means it will cost the state more to
borrow money.
The firm left California on credit watch with a negative outlook, a ranking
applied after the state began buying power for utility customers in January.
The state general fund has spent more than $5 billion buying power so far.
There are predictions that spending will sharply increase this summer as heat
drives up the demand for electricity.
"The fact is, we can't allow the general fund to be depleted," Angelides
said. "There are limits to it. It will begin to affect very dramatically the
ability of the state to provide core programs for education, health care,
public safety."

Developments:
WEDNESDAY:
) No power alerts are called in the early morning, as electricity reserves
stay above 7 percent.
) The state Public Utilities Commission continues hearing energy experts
evaluate ideas for implementing a recent rate increase. The panel includes
George Sterzinger, a Washington-based renewable energy consultant; Peter
Bradford, an energy and regulatory adviser; and Severin Borenstein, director
of the University of California, Berkeley's energy institute.
) Assembly Energy Committee holds a hearing on Gov. Gray Davis' proposal to
keep Southern California Edison out of bankruptcy.
TUESDAY:
) Gov. Gray Davis says California will build enough power plants by 2003 to
end the state's power crisis, and have a 15 percent supply surplus by 2004.
He names former U.S. diplomat Richard Sklar to be the state's new energy czar
and head a Generation Implementation Task Force to speed up power plant
siting and construction.
) The Independent System Operator, which runs the state's power grid,
declares a Stage 2 alert, meaning the state is within 5 percent of running
out of power. It warns rising temperatures could create problems later this
week unless Californians conserve electricity.
) Standard and Poors lowers its rating on California state bonds, citing the
growing financial drain from the continuing energy emergency. The state must
quickly replenish its coffers if it is to avoid further damage, the rating
agency says.
WHAT'S NEXT:
) Davis' representatives continue negotiating with Sempra, the parent company
of San Diego Gas and Electric Co., to buy the utility's transmission lines.
Davis says he expects to have an agreement within two weeks.
) Senate Select Committee to Investigate Price Manipulation of the Wholesale
Energy Market continues its investigation Thursday.

Standard & Poor's said that if the sale of a state revenue bond is delayed,
the potential impact on the state general fund could be "severe" without a
rate hike much larger than the increase of more than 40 percent approved by
the state Public Utilities Commission last month.
"Rate increases appear difficult in the present political environment, and
related voter initiatives, although none are currently on the ballot, remain
a possibility," said Standard & Poor's.
The state began buying power after the two largest utilities, Pacific Gas and
Electric and Southern California Edison, were nearly bankrupt. The rates they
could charge customers were frozen under deregulation as the cost of
wholesale power soared, producing a debt of $13 billion.
Standard & Poor's said the state expected in January to spend less than $1
billion and resolve the problem in a few months with long-term power
contracts at lower prices. But most of the contracts do not begin until this
fall or later.
"In addition," said Standard & Poor's, "it is not unreasonable to expect past
and future blackouts to affect business location decisions, and hence the
ultimate direction of the state's economy."
A spokesman for the governor said that Standard & Poor's view of how the
California economy will fare during the electricity crisis is far too dim.
"California's economy is still fundamentally strong," said spokesman Roger
Salazar. "We expect that in 2001 we will continue to lead the nation in
economic growth and job creation."
Another Wall Street credit-rating firm, Moody's, has a more positive view of
how the governor and the Legislature have handled the crisis and expects the
state general fund to be repaid by the ratepayer bond.
"We are still at our AA2 with a negative outlook," said Ray Murphy, Moody's
vice president. "Nothing that we have learned over the last week or so has
led us to change that opinion."
Angelides said legislation is needed because PG&E and Edison are challenging
a PUC action last month that gives the state some revenue from monthly
ratepayer bills, which is needed to finance the bond to repay the state
general fund.
The utilities say they need more of the ratepayer revenue.
The treasurer said the legislation would bypass the lengthy PUC process and
authorize the state to issue a ratepayer bond of $10 billion or more. The
governor said again yesterday that he believes a bond of $12.4 billion will
cover state power costs this year.
Angelides said legislation is urgent because a commitment from three lenders
to give the state a $4.1 billion short-term loan expires May 8.
He said the short-term bridge loan would ease the strain on the state general
fund until the main bond can be issued, probably in late June.
The treasurer said that failure to obtain the short-term loan could lead to
more credit downgrades and "create perception issues about who we are and
where we are in terms of the economy of this state."
Davis has been criticized on Wall Street for not pushing for an early rate
hike to stabilize the utilities and avoid the need for the state to begin
buying power.
The governor said earlier this year that he could have solved the problem in
"20 minutes" with a rate hike, but refused to do so.
While addressing the California Chamber of Commerce yesterday, Davis said
that the long-term contracts will spread the cost of buying power over a
decade, causing ratepayers to pay less than market rates in the early years
and a little above the market rate in later years.
"I do not want to shock this economy into recession," Davis said. "I do not
want to burden small business with more than they can sustain."
Davis wants the state to purchase the transmission systems of the utilities
in exchange for giving them part of the ratepayer revenue to finance a bond
to pay off their debts. That would enable the utilities to resume buying
power by the end of next year.
But negotiations to buy the transmission systems has taken much longer than
expected. PG&E filed for bankruptcy earlier this month, and an agreement to
buy the Edison transmission system announced a few days later faces
opposition in the Legislature.
Some legislators, who think Edison receives too much under the complex
agreement, have suggested that Edison join PG&E in bankruptcy, where
generators accused of price-gouging may not have all of their bills paid.
"If they go into bankruptcy, the state will be buying power for three or four
years," Davis told the Chamber yesterday. "That is all we will be doing up
here."
A Stage 2 emergency alert was called yesterday when two power plants
unexpectedly stopped operating with temperatures around the state rising.
Meanwhile, Davis announced that Richard Sklar, a former ambassador to the
war-torn Balkans, will lead a task force to speed up the construction of new
power plants.
The governor acknowledged while speaking to reporters that he has not met his
earlier goals of avoiding blackouts, rate increases and keeping the utilities
out of bankruptcy.
"This is probably the most complicated challenge the state has faced in 50
years," Davis said. "But we are providing steady and reliable leadership, and
I believe we will have this thing behind us by the end of this fall."
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FERC to weigh limited curbs on electricity prices

Caps would apply in Stage 3 shortages
By Toby Eckert
COPLEY NEWS SERVICE
April 25, 2001
CALIFORNIA'S
POWER CRISIS

WASHINGTON -- Federal regulators are expected to consider limited wholesale
price curbs for California's chaotic electricity market today, but the
approach falls far short of the controls sought by many state officials.
Federal Energy Regulatory Commission staffers have proposed limiting the
price that power sellers can charge for wholesale electricity in California
only during the most severe shortages, known as Stage 3 emergencies. The
"price mitigation" would be pegged to "the marginal cost of the
highest-priced (generating) unit called upon to run," according to a staff
report.
Producers also would be required to sell their excess power to the state's
grid operator.
The price controls would last one year and would not apply to other Western
states suffering from gyrations in power costs and electricity shortages.
FERC Chairman Curtis Hebert has been an implacable foe of price controls, but
is under considerable political pressure to do more to help California as the
peak power-consuming summer months approach. Commissioner William Massey has
advocated far-reaching price limits, while Commissioner Linda Breathitt has
wavered on the issue.
Gov. Gray Davis and other California officials have called for broad price
controls that also would include 10 other Western states. Yesterday, Sen.
Dianne Feinstein, D-Calif., formally introduced legislation that would
require FERC to impose regional price limits through March 1, 2003.
Feinstein said the FERC staff proposal was inadequate.
"Once you put the cap just on Stage 3, you force the heavier pricing on
stages 1 and 2," she said.
Other critics have noted that wholesale power prices in California are
abnormally high during periods other than Stage 3 emergencies.
Feinstein's legislation, first outlined in March, would require FERC to set
price caps or impose "cost-based" rates that would limit prices to the cost
of producing the power, plus a set profit margin. New generating plants and
power bought through long-term contracts would be exempt.
However, any state covered by the price controls would have to allow
utilities to recover their wholesale power costs from consumers. The clause
helped draw a Republican co-sponsor to the bill, Sen. Gordon Smith of Oregon.
Smith and other Western lawmakers have complained about the reluctance of
California officials to raise retail rates while consumers in neighboring
states have seen their power bills soar. In recent months, the California
Public Utilities Commission twice has increased rates for customers of
Southern California Edison and Pacific Gas and Electric, the utilities hit
hardest by skyrocketing wholesale power prices.
The FERC staff proposal rejected price caps or cost-based rates.
It would be hard to devise price caps that are low enough to provide price
relief, but high enough to adequately compensate generators, the proposal
said.
The Bush administration and top congressional Republicans are opposed to
price controls, so it is uncertain how far Feinstein's legislation will get.
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Grid officials declare a Stage 2 alert

ASSOCIATED PRESS
April 24, 2001
SACRAMENTO ) The state's electric grid operator declared a Stage 2 power
alert Tuesday after two power plants suddenly went offline.
Higher-than-forecasted temperatures in Southern California also caused demand
to increase, said Lorie O'Donley, spokeswoman for the Independent System
Operator, keeper of the state power grid.
A Stage 2 alert is declared when electricity reserves fall or are expected to
fall below 5 percent.
The two power plants that went offline had been producing about 1,080
megawatts, or roughly enough power for 810,000 homes.
"We think we may need to request interruptible customers, but barring any
other big problems, we probably won't need to go to a Stage 3," said
O'Donley. Stage 3 alerts are called when the reserves drop below 1.5 percent
and could result in rolling blackouts like the state has seen on four days
since January.
The ISO said 9,900 megawatts were unavailable Tuesday morning because of
power plants that were down for scheduled or unplanned maintenance. Another
3,000 megawatts from alternative generators, such as solar, wind and
geothermal, was also not available, O'Donley said.
About half of the alternative generators say they can't afford to keep
operating because they are owed about $1 billion by Pacific Gas and Electric
Co. and Southern California Edison.
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Top credit agency lowers California's bond rating

ASSOCIATED PRESS
April 24, 2001
SACRAMENTO ) A top credit agency lowered its rating on California state bonds
Tuesday, citing the growing financial drain from the continuing energy
emergency.
"The downgrade reflects the mounting and uncertain cost to the state of the
current electrical power crisis, as well as its likely long-term detrimental
effect on the state's economy," Standard and Poors said.
The state's ability to repay is debts has been reduced, though it is still
adequate, S&P said.
It dropped the rating on general obligation bonds from double-A to
single-A-plus. It similarly revised other lease ratings, and ratings for the
California Health Facilities Construction Loan Insurance Fund, known as Cal
Mortgage.
S&P said it didn't drop the rating farther because the state still has money,
because of California's diverse economy, and because a proposed revenue bond
is slated to reimburse the state's treasury for money California is currently
using to buy power for two financially strapped utilities.
If the state can't quickly sell its revenue bond, the impact on the treasury
could be severe unless electricity rates are substantially increased beyond
the large increases already scheduled to kick in, S&P warned.
S&P has had the state's general obligation bonds on a credit-watch "with
negative implications" since January, when the state began buying power for
Southern California Edison and Pacific Gas and Electric.
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State's Bond Rating Downgraded to A+
Finance: Reduction of 2 notches puts it among states with the lowest credit
ratings. Move could cost California hundreds of millions in borrowing fees.

By LIZ PULLIAM WESTON and MIGUEL BUSTILLO, Times Staff Writers

?????A major credit rating agency downgraded $25 billion of California bonds
Tuesday in a move that could add hundreds of millions of dollars to the
state's borrowing costs and saddles California with one of the lowest state
credit ratings in the nation.
?????Standard & Poor's Corp. cut California's bond rating by two notches,
from AA to A-plus, citing "the mounting and uncertain cost . . . of the
current electrical power crisis," which has forced the state to spend
billions on electricity to keep the lights on.
?????S&P, one of three major rating agencies monitoring California's
financial health, said a further downgrade could occur if the state fails to
follow through on plans to issue at least $10 billion in revenue bonds to
help pay off energy-related debts.
?????"S&P is saying, 'We don't have any faith that what you say you're going
to do, you're going to do,' " said Zane Mann, publisher of the California
Municipal Bond Advisor, a newsletter that tracks government debt.
?????Wall Street is concerned by delays surrounding the electricity bond
issue, but lawmakers hope to pass legislation this week to put the bond issue
on a fast track and speed up return of the money to the state's general fund.
?????Credit ratings help determine how much states and other borrowers have
to pay when issuing bonds. The lower the rating, the higher the interest rate
the state must pay to entice investors to buy.
?????The state Treasurer's Office concluded in a preliminary estimate that as
a result of the downgrade, California could have to pay $190 million to $570
million more on the $12 billion in general obligation bonds the state has
authorized to pay for ongoing expenses such as school and road-building
projects, but has yet to issue.
?????State revenue bonds should not be affected by the downgrade, the
officials said. However, some bond experts disagree.
?????California's energy crisis already has driven down prices of a wide
range of the state's bonds, from general obligation issues that depend on the
state's ability to repay to small issues by school districts and cities that
could be hurt by rising electricity prices. Bond traders said S&P's downgrade
probably would cause prices to fall further.
?????"All California bond holders are going to lose value in their bonds
because the state's credit has been downgraded," said John Fitzgerald,
managing partner of Seidler-Fitzgerald, a Los Angeles municipal debt
underwriter.
?????The downgrade most affects investors who want to sell their bonds now,
before the issues mature. Investors who hold onto their bonds are still
almost certain to get the face value when their securities reach maturity,
because the state is unlikely to miss any interest payments or otherwise
default on its bonds, traders said.
?????S&P analysts said the state's continuing surplus and "deep and diverse"
economy helped prevent a further downgrade.
?????Still, the downgrade places California below most other states on S&P's
rating scale and on par with Hawaii. Among states rated by S&P, only
Louisiana has a lower rating, at A-minus, according to Bloomberg News.
?????In addition, the two other major credit rating agencies have indicated
they may downgrade California's bonds. Fitch Inc. said last week that it was
contemplating such a move, and Moody's Investors Service earlier this month
changed its outlook on California bonds to "negative" from "stable."
?????Some politicians Tuesday accused S&P of overreacting.
?????"It's just unfair, premature and inappropriate for them to do that. We
do have reserves, we do have good revenue projections, we do have a plan to
get us out of this," said Assemblyman Gil Cedillo (D-Los Angeles).
?????In a statement, Gov. Gray Davis said California's economy "is still
fundamentally strong, period. We expect that in 2001 we will continue to lead
the nation in economic growth and job creation."
?????State Treasurer Phil Angelides has been pleading with lawmakers to pass
legislation to speed up repayment of $5 billion drained from the state's
general fund to buy electricity this year. That figure is expected to reach
$15 billion by year's end, according to the governor.
?????The consequences of a downgrade are profound, Angelides said, noting
that it took California years to overcome the downgrades spurred by the
recession of the early 1990s.
?????"It is critical that the Legislature act immediately to clearly
establish our legal authority to sell bonds and replenish the state's general
fund," Angelides said.
?????California began buying massive quantities of electricity in January
because the state's three major investor-owned utilities could no longer
afford to do so. Since then, the state has been purchasing roughly one-third
of the electricity the utilities need to service their customers, according
to state officials.
?????Under a plan approved by the Legislature and signed into law by Davis,
the general fund is supposed to be reimbursed for the power purchases with
what is expected to be the largest municipal bond issue in U.S. history. The
bond issue is to be repaid by utility ratepayers through a monthly charge on
their electricity bills.
?????However, obstacles that threaten timely repayment of the fund are
causing consternation among Wall Street analysts about California's financial
status.
?????The bankruptcy filing of Pacific Gas & Electric Co., the state's largest
investor-owned utility, has thwarted the state's plan to restore the
utilities to financial health.
?????But it is a dispute over the state's formula for repaying the bonds that
has raised the most concern among state officials. The state and the
utilities are at odds over how much of consumers' electricity payments should
go to reimburse the state for its power purchases.
?????The state's two major utilities, Pacific Gas & Electric and Southern
California Edison, have challenged the Public Utilities Commission's plan for
splitting up the money--a legal move that threatens to delay issuance of the
bonds. The firms contend the allotment granted to the state is too generous
and could make it harder for them to recover from the energy crisis.
?????Hoping to sidestep the controversy, Angelides is urging state lawmakers
to pass an emergency measure this week that sets the bond amount and the
amount the state will receive from utility payments. The revenue bond was
initially expected to be $10 billion, but the Davis administration has since
proposed a $12.4-billion issue.
---
?????Times staff writers James Flanigan, Jenifer Warren and Julie Tamaki
contributed to this report.

Copyright 2001 Los Angeles Times
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Price Controls Spark Deja Vu

Energy: The specter of Richard Nixon's actions 30 years ago hangs over
current debate on how to check the state's surging power costs.

By JAMES F. PELTZ, Times Staff Writer

?????A debate now rages in California over whether price controls should be
adopted to stem the state's soaring power costs and help consumers who are
bracing for huge spikes in their electric bills.
?????But price controls are one of the most controversial actions in
economics--and in politics, for that matter. And now the caps are more in
dispute than ever because they run counter to the nation's move over the last
two decades to deregulate more and more industries, from airlines to
railroads to energy.
?????Yet California is a good example of deregulation gone haywire, so
controls are again being demanded by lawmakers, consumer advocates and others
as a way to check surging prices. On the other side is a chorus of critics
who ridicule price caps as being ineffective and, at times, making matters
worse for consumers.
?????Case in point: the Golden State itself, which tried last summer to use
temporary price caps to keep a lid on skyrocketing wholesale electricity
prices.
?????Critics claim that the caps drove power sales out of state, thus
widening the imbalance between supply and demand, reinforcing the existing
shortages and contributing to this winter's rolling blackouts.
?????But defenders of the caps note that the dysfunctional California market
had no way to self-correct. The utilities couldn't simply refuse to buy
electricity in the face of higher prices, and with no price ceiling in sight,
something had to be done.
?????And now Gov. Gray Davis and others are again calling for temporary
controls until more electricity supplies can be added, especially as the
state enters the peak-power summer season. On Tuesday, Sens. Dianne Feinstein
(D-Calif.) and Gordon Smith (R-Ore.) introduced legislation that would impose
price controls on wholesale energy throughout 11 Western states.
?????Mindful of the controversial history of controls, Feinstein and Smith
stressed that the caps would last only through March 1, 2003. But they also
argued that the economic damage to industries and consumers from escalating
power costs would exceed any harm caused by price controls.
?????"I have a strong preference for markets, but it's a mistake to believe
that we have a free market when it comes to energy," said Smith, the only GOP
co-sponsor of the legislation.
?????Their bill would require the Federal Energy Regulatory Commission, which
regulates U.S. wholesale electricity prices, either to impose a regional
price cap or institute a rate schedule for each power generator, tying the
price of electricity to the cost of producing it.
?????Coincidentally, FERC today is expected to decide on various other
proposals to again limit California's power costs--but without explicitly
stating that the plans include price controls. Why? Because the Bush
administration and FERC Chairman Curt Hebert Jr., among others, are on the
record as adamantly opposing price caps.
?????That's not surprising. Price controls often are tagged as a liberal
maneuver that flies in the face of conservatives' free-market ideology. Yet,
ironically, hanging over the California debate is the legacy of a Republican
president who was the last one to mandate price controls on a nationwide
level: Richard M. Nixon.
?????The late president took that rare step 30 years ago this August to try
to quell inflation and spark an economic rebound. His actions were so
dramatic that they are still invoked by those wanting to criticize or, in
some cases, endorse setting limits on prices.
?????"What he did is almost larger than life now," said Shannon Burchett,
chief executive of RiskLimited Corp., a strategic consulting firm in Dallas.
?????Nixon's controls were the most far-reaching since World War II, when
prices were capped so that profiteers couldn't reap huge sums for scarce
commodities being used for the war and simultaneously rationed at home.
?????In most cases, price controls have been much less sweeping and targeted
at specific products or services. They don't always involve changing the law,
either. In 1962, President Kennedy publicly rebuked the then-U.S. Steel Corp.
and its chairman, Roger Blough, for starting an industrywide move to raise
steel prices. The price hikes were rolled back a few days later.
?????Since Nixon, price controls have become rarer as industries that were
once regulated--which means their prices were government-controlled--have
been deregulated.
?????So it is in California, where electric utilities' prices were controlled
for decades until the state's deregulation law in 1996. But now that the law
has been blamed for the soaring wholesale prices, power shortages, crippled
utilities and the need for a huge jump in ratepayers' costs, some again want
price controls on electricity until the crisis eases.
?????Which brings everyone back to Nixon.

?????Some Nixon Controls Were Lifted by Reagan
?????"I've heard people make the analogy to what happened . . . when Nixon
put on controls," but in California "this is fundamentally different," said
Mike Florio, a board member of the California Independent System Operator,
which oversees most of the state's electricity grid.
?????"When you get into a situation of shortage [of supplies], there is
really no restraint at all on prices," said Florio, who said he normally
prefers unfettered markets but also defended the state's caps last summer.
Such government intervention "on a temporary basis is better than nothing,
but I don't think it's ideal."
?????The reverberations from Nixon's fiat aren't just felt in California
either. When New York Mayor Rudolph Giuliani recently proposed more stringent
controls on wholesale electricity costs in New York state, critics promptly
pointed to Nixon's controls. "They were a disaster," one columnist wrote.
?????Even Federal Reserve Chairman Alan Greenspan, who was in the private
sector in the early 1970s, turned down several requests to take high-level
White House jobs in part because he was disgusted with Nixon's price controls.
?????Many economists and historians also judge Nixon's controls as a mistake.
But some maintain that his decision--which began with a 90-day freeze on
prices, wages and rents--wasn't entirely a failure and even provided "shock
value" that, for a while at least, arrested higher inflation.
?????In addition, part of Nixon's move involved taking the dollar off the
gold standard--which in effect meant its price was controlled--and letting it
float in value against other major currencies. And that, many believe, is the
base upon which today's global financial markets operate.
?????Others disagree.
?????"There really isn't an example of where they've [price controls]
worked," said Robert Goldberg, a senior fellow at the National Center for
Policy Analysis, a nonpartisan think tank in New York.
?????"Controls always lead to an underproduction" of the commodity involved
because producers don't have any incentive to spend more on additional
output, he said. When the caps ultimately are lifted, prices typically soar
anyway as producers move to quickly recoup the profit they lost when the
controls were in place, Goldberg added.
?????Others note that although most of Nixon's price controls lasted only a
couple of years, various forms of controls over crude oil and natural gas
lasted for another decade until they were removed by President Ronald Reagan.
?????In the meantime, the controls--aggravated by embargoes and other supply
cuts by the Organization of Petroleum Exporting Countries--distorted the free
market for energy, critics say. The controls kept U.S. oil prices
artificially low, which in turn kept demand for oil high, giving OPEC more
power over world production and prices in the 1970s, they contend.
?????Nonetheless, proponents keep calling for controls when prices for
certain items seem to be spiraling out of control.

?????Critics Say Controls Worsen the Problems
?????President Clinton's massive health-reform proposal in the early 1990s
included price controls on drugs. But the idea set off howls of protest from
the pharmaceutical and biotechnology industries, and ultimately the entire
proposal was shelved. Consumer advocates and others also demanded federal
controls on rising cable TV rates in 1997 and 1998, again contending that the
cable operators were hiking prices at a much faster rate than inflation.
Cable firms were allowed to keep passing certain costs on to their
subscribers, but specific price caps weren't enacted.
?????But proponents of temporary price controls on California power emphasize
that electricity isn't in the same category as an airplane seat, steel or
other commodities that don't have to be bought if the price soars too high.
?????"In soybeans maybe the market can adjust quickly" to changes in supply
and demand, "but in electric generation in California it can't," said Florio,
who also serves as an attorney for the Utility Reform Network, a consumer
group. "For most products, one of the ways prices get determined is if buyers
refuse to buy when the price gets too high. But that's generally not an
option for people when it comes to electricity."
?????Critics of California's attempt to cap prices last summer said the
controls instead prompted many power suppliers to sell their electricity to
other states. That "actually made the tight-supply problem worse [in
California] by driving imports out of the state," the Bay Area Economic
Forum, a research group funded by regional business and government agencies,
said in a report last week.
?????Indeed, the temporary caps were basically abandoned by year's end to
keep enough electricity in the state.
?????Frank Wolak, a Stanford University economics professor who heads the
Independent System Operator's market surveillance committee, said there are
ways to mitigate the state's power prices without having to set rigid
controls. One proposal: Have FERC require that generators supply 75% of their
expected future sales to California under long-term contracts at "just and
reasonable" prices set by the federal agency, he said.
?????That would "send the right [price] signal to suppliers to come into the
state," Wolak said.
?????And because it will take time for California to get more of its own
power-generating plants up and running, the state's electricity crisis isn't
unlike a natural disaster in which "normal public service is disrupted" and
short-term controls serve a purpose, Florio said.
?????"Over time, market forces will work" and controls shouldn't be need, he
said. "But does that mean we're supposed to pay $10,000 per kilowatt-hour
until something gets done?"
---
?????Times staff writer Ricardo Alonso-Zaldivar in Washington contributed to
this report.

Copyright 2001 Los Angeles Times
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Davis Names Executive to Speed Construction of Power Plants in State

Energy: Richard Sklar headed a building firm and worked for Clinton in
Bosnia. Governor sees the crisis abating by fall.

By DAN MORAIN, Times Staff Writer

?????SACRAMENTO--With temperatures rising and electrical supplies strained,
Gov. Gray Davis on Tuesday tapped a former Clinton administration official
and executives from major construction firms to help speed completion of
power plants.
?????Davis, who predicted that the worst of the energy crisis will abate by
the fall, announced that he has retained Richard Sklar, 67, former president
of a construction firm, to head a team that will help accelerate the building
of power plants.
?????Speaking to business leaders at a California Chamber of Commerce
convention in Sacramento, Davis said Sklar's job will be "to make sure there
are no hurdles [and] to cut red tape."
?????"Richard Sklar knows electricity," Davis said. "He knows how to find
megawatts."
?????Former President Bill Clinton sent Sklar to the Balkans in 1996 to try
to help resolve the war in Bosnia-Herzegovina. Sklar arrived in Sarajevo to
find that power was on for only two hours a day and set about expanding
electricity generation.
?????In an interview, Sklar said his father was a mechanical engineer who
designed power stations.
?????"This power world is my world," Sklar said, adding that he had an
electric car and solar panels in the mid-1970s.
?????This Feb. 8, Davis announced at a news conference that he was appointing
Larry Hamlin, a vice president of Southern California Edison, as his
"construction czar." Hamlin's job was to speed power plant construction.
?????Davis spokesman Roger Salazar said that Hamlin's stint was temporary and
that the executive must return to Edison. Sklar's contract is for a longer
period, Salazar said, but it is unclear how long.
?????Sklar is being retained as a consultant, paid $100,000 initially. Other
firms, Salazar said, are loaning employees as volunteers. Joining Sklar will
be representatives of the engineering and construction firms Bechtel, URS
Corp. Engineering, Fluor Daniel, Parsons Brinckerhoff Quade & Douglas, and A.
Teichert & Sons. At least one Bechtel subsidiary is involved in power plant
construction in California.
?????"There is no conflict of interest," Sklar said, adding that no one in
the group will have authority to decide who gets contracts.
?????A mechanical engineer, Sklar was president of the San Francisco-based
construction management firm O'Brien Kreitzberg Inc. Sklar's firm also
oversaw construction of the Metro Rail Green Line in Los Angeles and the
rebuilding of the Los Angeles Central Library.
?????He was also chairman of the San Francisco Public Utilities Commission
under then-Mayor Dianne Feinstein. In that role, he oversaw rebuilding of the
cable car system, completing the work ahead of schedule--in time for the 1984
Democratic National Convention there. Feinstein's husband is a major investor
in URS, one of the firms that will loan employees to Sklar's team.
?????"He's very competent," said state Senate President Pro Tem John Burton
(D-San Francisco) of Sklar, whom he met in 1972. "He's a very good problem
solver and he brooks no nonsense. . . . He's a renaissance man. He loves
music, he loves politics and he's a gourmet cook."
?????Sklar has also displayed a sense of humor, once donating to San
Francisco Zoo two capybaras, rodents the size of a hog. He named one Quentin
and the other Kopp, after a former San Francisco city supervisor and state
senator who is now a Superior Court judge.
?????"I'm 67; I've made all the money I need to make," said Sklar, who owns a
vineyard near the Napa Valley town of Rutherford and has a home in San
Francisco.
?????"My reputation is what's going to be at stake in this, not the
governor's," he said. "I have a 40-year history of delivering--and that's
what I'm going to do. I don't like to lose."
?????As Davis announced Sklar's appointment, one of the governor's top energy
advisors, John Stevens, resigned, effective Friday. The governor praised
Stevens as a tireless worker.
?????Stevens worked on several energy-related tasks, among them Davis'
efforts to keep utilities out of bankruptcy. Davis appointed him for a day in
January to the state Public Utilities Commission, on which he cast a key vote
to raise rates.
?????The state's power grid operators declared a Stage 2 emergency Tuesday
afternoon, as temperatures hit 90 degrees in downtown Los Angeles and two
major power plants in Southern California unexpectedly shut down. Power
reserves dropped to nearly 5%, below the minimum 7% that the California
Independent System Operator seeks to maintain.
?????Tuesday's emergency is not a predictor of worse electricity troubles to
come, said Cal-ISO's Stephanie McCorkle, because an unusually high number of
power plants are down for repairs that were planned months ago.
?????The plants not running Tuesday would be capable of supplying 10,000
megawatts, she said, or about a third of Tuesday's peak demand. By mid-June,
no power plants should be shut off for scheduled maintenance, McCorkle said.
?????The state will lose more than 1,000 megawatts of production starting
this weekend when a unit of the Diablo Canyon nuclear power plant near San
Luis Obispo is shut down for refueling. The shutdown, planned a year ago,
will last 35 days, according to Pacific Gas & Electric.
?????In his remarks Tuesday, Davis said his goal is to boost the state's
energy supply to exceed demand 15% by 2003.
?????"This is probably the most complicated challenge the state has faced in
50 years," Davis said. "But we are providing steady and reliable leadership,
and I believe this thing will be behind us by the end of fall."
---
?????Times staff writers Nancy Vogel and Jenifer Warren contributed to this
story.

Copyright 2001 Los Angeles Times
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Power Plant Emits Tons of Fumes

Round-the-clock operation of old generators in Glendale and elsewhere
produces more than twice the old limits of pollution.

By JEAN GUCCIONE, Times Staff Writer

?????For the past five weeks, Glendale's Grayson power plant has been
belching a half-ton of pollutants into the air almost daily, more than twice
previous limits.
?????The same is true for many of the other 14 power plants in Southern
California as the "haves" generate power, sometimes round-the-clock, for the
"have-nots."
?????The generators, some of them nearly 50 years old and once considered too
dirty for regular use, now keep electricity flowing to fellow residents
around the state. And those living downwind are subjected to twice as much
air pollution as before California's energy crunch.
?????Not every Glendale resident is happy.
?????"You don't want anyone to get stuck with a rolling blackout, but we get
struck with the pollution," Jerold Petrosian said as he and his family bought
plants at a nursery across the street from the power plant. "It is a tough
decision."
?????Not so for Ignacio Troncoso, director of Glendale Water & Power. "There
is a pretty decent trade-off, helping our neighbors in the state to keep
their lights on," he said.
?????A USC specialist warned that increased power plant emissions raise the
risks of asthma and other lung ailments in the young and old.
?????"There is a potential for more emergency room visits, more people seeing
their doctors and more hospitalizations this summer," said Dr. Henry Gong,
professor of medicine and a specialist in the health effects of air pollution.
?????With extended hours, the Glendale generators are emitting as much as 995
pounds of pollutants into the air during peak demand, more than double the
old limit of 390 pounds a day, city and air-quality officials said.
?????The other 14 power plants in Southern California also have more than
doubled their overall emissions, according to preliminary figures from the
South Coast Air Quality Management District. As a group, the plants emitted a
total of 2,045 tons of smog-forming nitrogen oxide in the first three months
of 2001, compared with 905 tons for the same period last year.
?????The AQMD hearing board on Tuesday eased pollution controls so Glendale
may continue to generate excess electricity for sale to the energy-starved
state. Under the plan, Glendale may run three of its old steam boilers
around-the-clock to meet the state's energy demand. Usually, these boilers,
hidden behind a tall brick wall, sit idle except during the peak summer
demand because they are inefficient and costly.
?????Glendale, like Burbank and the Los Angeles Department of Water and
Power, continues to produce electricity at its city-owned plant. The three
cities opted against participating in a scheme of deregulation, a decision
that has shielded their residents, by and large, from the huge utility rate
hikes and rolling power outages experienced elsewhere. But they also will
contribute to easing the state's energy emergency in the dirtier air they
will be forced to breathe.
?????Air-quality officials said power plants contribute just about 3% of the
900 tons of pollution emitted into the air daily, with about 70% of the
pollution coming from vehicles, not factories. And in recent years, many of
the region's municipal power generators have been updated with
pollution-control devices that reduce emissions.
?????Glendale's three steam generators, built between 1953 and 1963, are
inefficient by today's standards, but they are 85% cleaner since the city
pumped millions of dollars into upgrades. They will be even cleaner, city
officials say, with more retrofitting.
?????Under the plan, Glendale must reinvest profits from energy sales,
estimated at $3 million to $5 million this year, in equipment to reduce
future emissions at the plant and in community-based programs, such as mobile
asthma clinics and programs to reduce school bus emissions.
?????The city plans to sell as much as 50 megawatts of power, enough to serve
50,000 homes. Under the decision Tuesday, pollution limits resume Jan. 1,
2002, or when the energy emergency ends.
?????In Los Angeles, power officials said they don't expect to exceed AQMD
caps, because they are adding pollution controls at two of the city's four
power plants. Although they will produce more electricity, they should not
produce any more nitrogen oxide, which in sunlight and heat form ozone, said
Angelina Galiteva, LADWP's director of strategic planning.
?????"We will have much cleaner equipment in place by June," she said.
?????Even the environmentalists are trying to balance the risks.
?????"We realize we have a problem this summer. We have to run these plants,"
said Sheryl Carter, a senior policy analyst for the National Resources
Defense Council.
?????Carter said natural-gas-powered generators, like the ones in Glendale,
are "a far superior solution to diesel generators," which produce 50 to 100
times the emissions and would be turned on in businesses across the state if
energy is unavailable from other sources.
?????"We are trying to make sure the environment overall is made whole," she
said.
?????Carl Zichella, regional staff director for the Sierra Club, said the
generators should be run as a last resort. He also urged consumers to unplug
spare refrigerators and use energy-efficient light bulbs to reduce the
state's overall energy demand.
?????"The only thing that is going to work to offset air pollution is
efficiency," he said. Otherwise, "we will pay not only with higher rates but
also with our health."
?????In neighboring Burbank, city officials are preparing for peak summer
energy demands, when they expect to sell about 10% of their locally produced
electricity outside the city.
?????"For four or five years, we have been polluting Utah, Arizona, Nevada,
Washington and Oregon, importing power to Los Angeles," said Ron Davis,
general manager of Burbank Water & Power, listing the energy-producing states
that typically produce the bulk of Southern California's power. "We are
returning the favor."
?????Profits from those outside sales, Davis said, will help hold down
utility costs for local users.
?????"I think most people would take a little more smog to guarantee there
are no rolling blackouts," he said. "But it's not an easy question."

Copyright 2001 Los Angeles Times
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Power Plant Plan Worries Neighbors

Energy crisis: Regulators will decide next week whether to allow Huntington
Beach facility to boost output. Noise and pollution are concerns.

By CHRISTINE HANLEY, Times Staff Writer

?????On Hula Circle in Huntington Beach, families have tried to live with
their two very different neighbors. They live steps from the Pacific Ocean
but next door to the mechanical shrieks and foul smells of the massive AES
Corp. power plant.
?????But California's power crisis is rapidly unhinging life in the
neighborhood of ranch houses and bungalows.
?????State regulators will decide next week whether to allow the company to
double the plant's operations by July, providing much-needed electricity but
taking what residents fear will be a heavy toll on them.
?????It's one of several proposals to restart or build new power plants in
the wake of the power crisis using a "fast track" process that allows the
projects to go forward before environmental and pollution studies are
completed.
?????"The plant is so close. We want to know if it is impacting our kids in
ways we won't know about until 10 years from now," said Janette Mortimer, who
lives with her husband and their two young children in one of the homes
closest to the plant.
?????Already, residents say, the AES plant is casting a mightier shadow.
There are the ear-ringing rumbles and roars. There are the mysterious plumes
of smoke that waft over the neighborhood. Then there is the grime that seems
never to go away.
?????If the California Energy Commission approves the permit for AES, the
facility could run at full capacity for the first time in memory. Officials
said the plant's previous owner, Southern California Edison, typically ran it
at 30% of capacity.
?????AES could be allowed to run the four gas-fired boilers and a "peaker"
unit whenever California hits a Stage 3 alert--which is expected to happen
often this summer. The "peaker" plant alone is powered by eight jet
engines--and sounds like it.
?????Currently, only two boilers are operating.
?????But residents say they are most worried about the air they breathe and
the water they swim in.
?????Under the fast-tracking process designed to get more electricity for the
state as soon as possible, several key environmental questions have yet to be
studied.
?????Scientists studying the cause of ocean pollution that closed much of
Huntington Beach's shoreline in the summer of 1999 said that the plant, along
with other factors, played a role by drawing partially treated sewage that is
discharged miles offshore back toward the coast.
?????AES Inc. will pay $1.5 million to further study the issue, but the
research won't be complete for some time.
?????"So much is uncertain," said Huntington Beach Councilwoman Shirley
Dettloff. "These are big, big things."
?????For now, residents say they are bracing for more noise, smoke and
disruption.
?????To begin with, AES' proposal calls for 20 hours a day of nonstop
construction to get the two mothballed generators in service by July.
?????Then there are the sizzling summer temperatures. Residents usually open
their windows to let the ocean breezes cool their homes. But the noise and
smells from the plants may make that impossible.
?????"It's going to be bad. There's no escape," said Bryan Visnoski.
?????The plant has towered over the Huntington Beach coastline for nearly 40
years. The housing tracts came later, but most inhabitants of Hula Circle and
surrounding streets seemed to make peace with their industrial neighbor.
?????Some have installed double-paned windows to dampen the sound. Others
have remodeled their homes to obstruct ugly views. The Mortimers grew tall
trees and trained vines past the windows.
?????The problems, they say, began with the energy crisis.
?????The plant was owned by Edison until 1998, when it was sold to
AES--California's largest private electricity producer--at the dawn of
deregulation.
?????The two gas-fired boilers that AES wants to restart have been dormant
since 1995 and were slated for demolition until the power crisis struck.
?????But a few months ago as rolling blackouts hit the state, Gov. Gray Davis
signed an executive order allowing "peaker plants" to operate at extended
hours. "Peaker plants" can produce electricity in quick bursts but guzzle
large amounts of natural gas and are noisy.
?????Hulu Circle residents said the order has resulted in more hours of loud
jet noises that make then feel like they live by an airport.
?????Whenever the peaker plant goes on, residents call the Air Quality
Management District to send someone to test the plume of smoke. The
inspections have not detected any violations.
?????The proposal before the state Energy Commission would allow AES to
double its electricity output in Huntington Beach from 500 megawatts to 1,000
megawatts.
?????The company's two 40-year-old units represent about 10% of the 5,000
additional megawatts Davis has promised to meet an expected energy shortfall
this summer.
?????Despite the fast-tracking process, the company has vowed that it would
safeguard against environmental damage and remedy any problems from plant
operations.
?????If the plant is identified as drawing bacteria back to shore, AES would
have to pay the costs deemed necessary to fix problems.
?????This is little consolation to residents, who would prefer a full
environmental review.

Copyright 2001 Los Angeles Times
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Federal plan called 'too little, too late'
Limited price control seen as step in right direction, but officials renew
call for price ceiling Zachary Coile, Chronicle Political Writer
Wednesday, April 25, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/04/25/M
N104049.DTL

As federal energy regulators consider a plan intended to ease the state's
worsening energy crisis, California officials and some energy experts are
already criticizing it as inadequate.
The Federal Energy Regulatory Commission is scheduled today to debate a
proposal that would force power generators to sell electricity at a
discounted price to California during severe power emergencies.
The proposal would require producers to sell energy to the state's power grid
during Stage 3 emergencies. Stage 3 emergencies are declared when energy
resources are almost depleted, allowing utilities to cut off power to
customers at any time.
The plan also would limit how much energy firms could profit off such sales.
But Gov. Gray Davis and Sen. Dianne Feinstein, among others, say stronger
remedies -- including the temporary regional price limits they have advocated
for months -- are needed to stave off a summer of blackouts and power
shortages.
"I think the plan before FERC is too little, too late," Davis said yesterday
in Sacramento.
"We need help all the time. The regulatory commission plan excludes 95
percent of the purchases of power. A Stage 3 situation is, by definition,
chaotic as we scramble to find the megawatts to keep the lights on."
The commission ordered its staff in December to come up with remedies to
California's energy woes. The commissioners are expected to make their
decision by May 1, a self-imposed deadline to help the Golden State.
The proposal to be debated today would require producers to sell electricity
to California at a price based on the costs of the least-efficient plant
providing the energy. More efficient plants sending energy to the state would
still be able to make a sizable profit.
The plan has also drawn criticism because it applies only to California, not
other Western states that are also feeling the pinch of higher energy prices.
But California officials say the proposal does signal a shift in the hard-
line position of the commission's majority against any form of price
controls. The plan would set some form of price ceiling, even if only during
extreme conditions.
In regulatory commission documents, the plan is referred to as "price
mitigation" -- not price limits.
"I sincerely don't believe that FERC would even be considering the Stage 3 if
it were not for us making substantial noise about a temporary cap," said
Feinstein, D-Calif., who introduced a bill with other Western senators
yesterday to require the agency to impose temporary price controls on energy
sold to Western states.
Severin Borenstein, director of the University of California Energy
Institute, said the regulatory commission has yet to make a compelling case
for why its "Stage 3" plan would help lower sky-high prices.
"The argument being made to support this is that firms are only able to
exercise market power during Stage 3 emergencies," Borenstein said. "And the
evidence is quite clear that's just not true.
"It's unfortunate that FERC thinks this is solving some problem for
California, because it won't."
E-mail Zachary Coile at zcoile@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 10
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S&P lowers California's bond rating
First cut since '94 could cost taxpayers millions
Kathleen Pender, Chronicle Staff Writer
Wednesday, April 25, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/04/25/M
N211494.DTL

Citing the "rapidly escalating uncertainty" surrounding the power crisis,
Standard & Poor's slashed California's credit rating yesterday for the first
time since 1994, when the state was still climbing out of a recession.
The downgrade -- and the energy debacle that led up to it -- will cost
taxpayers tens or hundreds of millions of dollars a year by raising the
state's borrowing costs. Investors will probably see the market price of
California municipal bonds and bond funds decline further.
But the biggest blow may be to the state's ego. S&P downgraded the state's
general obligation bonds two notches -- to A+ from AA. The only other state
currently rated A+ is Hawaii. The only state with a lower credit rating is
Louisiana, according to S&P.
Most states are rated AA. Some states don't have a credit rating because they
don't have bonds.
California's credit rating is still "investment grade," which means it is not
expected to default on its bonds. However, the state's ability to repay its
debt "isn't as strong as it used to be," said Steve Zimmermann, a managing
director with Standard & Poor's. "This is a very speculative situation."
States hire companies like S&P to give them an independent credit rating when
they borrow money by selling bonds. The rating reflects the state's ability
to repay its debt in full, on time.
When they sell new bonds, states with lower credit ratings usually pay higher
interest than higher-rated states, to make up for the added risk.
A rating change does not affect the interest rate states pay on bonds that
have already been issued, but it can affect the price of bonds when they
trade on the open market among investors.
Yesterday's downgrade "reflects the mounting and uncertain cost to the state
of the current electrical power crisis, as well as its likely long-term
detrimental effect on the state's economy," S&P said in a news release.
"Given the large magnitude of the problem in relation to the size of fund
balances the state typically budgets, the capacity to pay debt service, while
still adequate, has been reduced."
In January, S&P placed the state's debt on "CreditWatch with negative
implications," a signal that it might lower the rating.
In an unusual move, S&P kept the state on CreditWatch after yesterday's
downgrade, which means the rating could fall even lower.
Zimmermann said S&P is keeping California on CreditWatch pending its ability
to sell $10 billion to $14 billion worth of bonds to reimburse the state's
general fund for past and future power purchases.
"If they did the bond issue, they'd replenish the fund, at least for the
short term. If they don't do it, then it's more of a concern," Zimmermann
said.
Unfortunately, the downgrade could make it harder for the state to sell the
bonds.
"If they could have gotten the deal done before the downgrade, they would
have had a stronger deal," said Kelly Mainelli, a municipal bond fund manager
with Montgomery Asset Management.
California must obtain an investment-grade rating (BBB- or higher) on the
bonds before it can sell them.
Mainelli said California municipal bond prices have already fallen in
anticipation of a ratings cut. When prices fall, bond yields go up.
"The downgrade is the culmination of everything that's happened since early
December," he said.
In November, California municipal bonds yields were 0.4 to 0.5 percentage
points below the national average. Today, they're 0.1 to 0.2 percentage
points above the national average, and Mainelli thinks they could go up 0.1
to 0.2 percentage points more because of the downgrade.
The total difference -- about 0.7 percentage points -- doesn't sound like
much, but it adds up.
Last year, the state itself sold $4.6 billion in new bonds (excluding bonds
sold to replace existing bonds). If it sells the same amount this year, plus
$12 billion in energy bonds, that 0.7 percentage point difference on $16.6
billion in bonds would cost the state $116 million a year in additional
interest costs.
Yesterday's downgrade only affected the state's general obligation bonds and
others secured by the "full faith and credit of the state," such as the
California Health Facilities Construction Loan Insurance Fund (Cal Mortgage).
But the energy debacle could wind up costing other municipal bond issuers in
California -- such as cities, counties, school and water districts -- more
money when they sell bonds. Although their ratings have not changed because
of the energy crisis, analysts say the yields on most California municipal
bonds have gone up, and will go up some more, as a result of the state's
downgrade.
"The values of all California bonds will be hurt by this downgrade, whether
they should be or not. Psychologically, it's just how the market reacts,"
says Richard Goldstein, a San Ramon financial planner.
Investors who have to sell their California bonds on the open market before
they mature may not get all their principal back. But investors who hold
their bonds until maturity will probably get paid in full, Goldstein said.
No matter how bad the energy crisis gets, most experts believe the state will
continue making principal and interest payments on its bonds, even if it has
to raise taxes, cut expenditures or run a temporary deficit to do so.
"There's also the prospect at some point of federal help," Goldstein said.
"The federal government does not want California to default or even come
close.
Do you know what that would do to the national economy and the world
economy?"
California's bond-rating history
S&P cut its rating on California debt yesterday for the first time since
1994.
What credit ratings mean
-- AAA: Extremely strong capacity to meet financial commitments.
-- AA: Very strong capacity to meet financial commitments.
-- A: Strong capacity to meet financial commitments but somewhat more
susceptible to adverse circumstances and economic conditions.
-- BBB: Adequate capacity to meet financial commitments. However, adverse
economic conditions could weaken ability to pay debts.
Note: Ratings below BBB are considered poor investment risks, and the issues
sometimes are called "junk bonds."
Source: Standard & Poor's
Chronicle Graphic
E-mail Kathleen Pender at kpender@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 1
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NEWSMAKER PROFILE
Richard Sklar
Ex-Muni boss becomes energy czar
Davis' pick to oversee power plant construction
Greg Lucas, Sacramento Bureau Chief
Wednesday, April 25, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/04/25/M
N232441.DTL
Sacramento -- San Franciscan Richard Sklar, onetime trouble-shooter for the
Municipal Railway and later a figure in the U.S. aid effort for Bosnia, will
head a team of construction experts working to build power plants faster,
Gov. Gray Davis said yesterday.
Sklar, 66, is the second energy "czar" the governor has appointed in a week.
Last week he named S. David Freeman, head of the Los Angeles Department of
Water and Power, to lead the state's conservation efforts.
"Mr. Sklar is with us for the long haul," Davis said after speaking to the
State Chamber of Commerce. "He's a no-nonsense person."
Sklar will work with representatives of some of the largest construction
firms in the world, such as Bechtel, to map out timelines and identify
potential problems in building power plants.
Under the Davis administration, 13 power plants have been approved, eight of
which are under construction.
"This is the red meat I chew on, my friend," Sklar said yesterday in a
telephone interview from New York.
"We're going to be getting these projects under way and follow them from the
'let's do it' stage to the day we cut the ribbon."
Sklar has already had a chance to study the energy situation in California
from afar. In January, while serving as then-President Bill Clinton's point
man for helping southeast Europe move toward capitalism, Sklar said,
"California is an object lesson in how not to deregulate. You've got to have
both capitalism and regulation."
The way California worked deregulation, Sklar said, was a "colossal mistake.
"
Sklar has more than 35 years of public and private management experience,
much of it in San Francisco.
He came to the city from Cleveland in the mid-1970s and soon joined the
mayoral campaign of the late George Moscone. Impressed by Sklar's drive,
Moscone handed him the reins to the city's huge wastewater program.
Sklar, known as a man of limitless self-confidence, quickly made a name for
himself as a head-knocking administrator with an abrupt management style, but
he got the languishing program moving.
Citing Sklar's "vigor and force," then-Mayor Dianne Feinstein appointed him
general manager of the San Francisco Public Utilities Commission, which
oversees the city's Water Department. He held the post until 1983 while also
leading the Muni for three years.
Sklar soon earned a reputation at City Hall for flamboyance. Critics said
Sklar enjoyed seeing his name in print and his face on TV a bit too much. He
took the criticism in stride.
"I inspire intense feelings," he told The Chronicle in 1982. "You love me or
you hate me -- and probably for good reason."
By the end of his tenure, Feinstein and Sklar were feuding openly over
everything from the Muni to high-rise development. The mayor called him
"arrogant." He, in turn, called her a "lightweight" who was no great
political star.
From 1983 through 1996, Sklar worked for San Francisco-based O'Brien-
Kreitzberg, one of the largest construction management firms in the United
States. The firm specializes in public works projects.
Sklar became the company's president in May 1995 after running O'Brien-
Kreitzberg's Eastern and international operations, a job that led to
Clinton's naming him to coordinate the rebuilding of war-ravaged Bosnia in
1996.
During Sklar's year on the job, the Sarajevo airport was quickly reopened,
and round-the-clock electricity was restored in the city before winter.
In 1997, Clinton named Sklar ambassador to the United Nations for reform and
management. His primary task was to shake loose from a reluctant GOP-
controlled Congress more than $1 billion in delinquent dues owed by the
United States.
In June 1999, he moved to Rome to serve as Clinton's point man on economic
development of southeast Europe. He is now a mediator specializing in
construction cases.
E-mail Greg Lucas at glucas@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 10
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Will price caps deter investment, as federal regulators say?
KAREN GAUDETTE, Associated Press Writer
Wednesday, April 25, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/04/25/state0
343EDT0117.DTL
(04-25) 00:43 PDT SAN FRANCISCO (AP) -- Some key power generators say
California's dearth of energy supplies, and its growing demand, make it a
good place to build more plants and sell more power in the years to come --
even if dreaded price caps are imposed.
``Regardless of what the (market) structure turns out to be, the state's
going to need electricity and it's going to need to buy it from somebody,''
said Bill Highlander, spokesman for San Jose-based Calpine Corp.
Calpine is investing about $4 billion in power plants over the next four
years that will generate 9,000 megawatts, enough for more than 6 million
homes. The state's current energy crisis ``hasn't really changed our plans or
our strategy,'' he said.
But Chief federal energy regulator Curtis Hebert says price caps on wholesale
electricity will hinder, not help, California's energy crisis.
Energy wholesalers seeking higher prices than California is willing to pay
will invest in other states, warns Hebert, the chairman of the Federal Energy
Regulatory Commission. And any regulations that cut into future profits will
scare away desperately needed new power plants, he says.
Eight of the 13 new power plants approved in California already are under
construction. Twelve more are under review, according to the California
Energy Commission, which approves power plants.
CEC spokesman Rob Schlichting said that's a huge boost over the last decade,
when uncertainty over the rules of deregulation -- not a threat of price caps
-- kept applications down. No companies have withdrawn plans to build plants
since December.
``The only way price caps would scare away investment is if they were set so
low you couldn't make a profit,'' Schlichting said. ``It's still a market
that people seem to want to come in and produce power for.''
Other companies still planning to invest in California include North
Carolina-based Duke Energy, which has two plants in the works, and
Houston-based Reliant Energy, which is negotiating with the state to sell
power on long-term contracts.
Reliant's spokesman, Richard Wheatley, wouldn't say whether price caps alone
would inhibit them from building more plants. What he did say is that
California's power politics leave a lot of room for improvement.
The state has considered taking over power plants through eminent domain and
implementing a windfall profits tax to take some of their earnings away.
Meanwhile, Attorney General Bill Lockyer is offering a bounty for any
information that could prove wholesalers worked together to drive up prices,
which could lead to more lawsuits and investigations.
If California wants to encourage construction, it's got to tone down its
vilification and stop adding more restrictions, Wheatley said.
``Whenever we go into an area and consider building a power plant, we have to
look at the economics of the facility, we have to look at the regulatory
situation, esoteric things like what the mindset is like,'' he said.
``California is not the easiest place in which to do business.''
Some power companies have invested so much in pipelines, gas reserves and
plants already under construction that it's folly to turn back now.
``We want to build in California, but we need to have regulatory stability or
at least regulatory clarity to move these things forward because they're
half-billion dollar projects in some cases,'' said Tom Williams, a spokesman
for Duke. ``That's a lot of bananas.''
Senators Dianne Feinstein, D-Calif., and Gordon Smith, R-Ore., plan this week
to introduce legislation urging FERC to impose a temporary price cap over the
11 Western states. They hope to keep prices down in the short-term and give
California and other troubled states a breather to make long-term decisions.
Feinstein's bill does not yet specify a price. Some economists say $150 to
$250 per megawatt hour would be just and reasonable, yet provide generators a
profit. Prices have gone as high as $1,500 for the same amount of power in
the past year.
Tying the price cap to the cost of making power could make it easier for
generators to swallow, said Severin Borenstein, director of the University of
California, Berkeley's energy institute. Such a cap would account for
variables such as the wildly fluctuating cost of natural gas used to generate
much of the energy in California's power plants.
Price caps can be effective, but only if they are very carefully designed,
warned Frank Wolak, chairman of the Independent System Operator's market
surveillance committee. The ISO manages the state's power grid.
Set them too high, and companies will only bid that amount, saving little
money, Wolak said. Too low, and the generators could choose to sell elsewhere
unless all other nearby states have the same price limits.
Also, capping the most expensive energy sales -- power sold on the spot
market at times of high demand -- won't lower prices for other key components
of the state's energy supply, such as electricity bought for the next day's
power needs.
``Suppose you're paying $150 every single (megawatt) hour. That still puts us
in big trouble with wholesale energy costs,'' Wolak said.
The state already has spent $5.1 billion buying power for customers of
California's three largest investor-owned utilities, which lost their credit
-- and thus their ability to buy power -- after paying sharply higher costs
for wholesale energy.
Borenstein said paying even $250 a megawatt hour is still preferable to the
unknown, particularly since economists have warned that there is virtually no
upper limit to what energy companies can charge.
``This summer we are going to be truly short of power and at those times the
price is going to be at the price cap, and if we don't have a price cap, they
will be way above the price cap,'' Borenstein said.
FERC remains opposed to price caps, but after months of complaints, the board
this week is considering a limited cap on the most expensive last-minute
power buys.
The proposal would cap California but not the rest of the West, and order
wholesalers to sell to the state during the most extreme power shortages.
Though it provides some cushioning, it does not address the high prices
California swallows the rest of the time. That's the point of Feinstein's
bill.
``The crisis point is this summer to next summer and we need some federal
assistance,'' said Howard Gantman, spokesman for Feinstein. ``This would
assure the generators a reasonable profit and continue to spur on further
investment into new plants.''
On the Net:
California Energy Commission: www.energy.ca.gov
,2001 Associated Press ?
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Credit agency cites power troubles; lowers state's bond rating

Wednesday, April 25, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/04/25/state0
552EDT0127.DTL
(04-25) 02:52 PDT SACRAMENTO, Calif. (AP) -- A major credit rating agency has
downgraded California's state bonds, citing the financial drain from the
continuing energy crisis.
``The downgrade reflects the mounting and uncertain cost to the state of the
current electrical power crisis, as well as its likely long-term detrimental
effect on the state's economy,'' Standard & Poors said Tuesday.
The state's ability to repay its debts, while still considered adequate, has
been reduced, S&P said in dropping the rating on California's general
obligation bonds by two notches from AA to A+. It similarly revised other
lease ratings, and ratings for the California Health Facilities Construction
Loan Insurance Fund, known as Cal Mortgage.
S&P is one of three major rating agencies watching the state's financial
performance. Credit ratings help determine how much states and other
borrowers must pay when issuing bonds. The lower the rating, the higher the
interest rate the state must pay to attract bond investors.
The downgrade now puts California's credit rating behind many other states
and on par with Hawaii, which also has an A+ rating from S&P.
Preliminary estimates from the state's Treasurer's Office estimated that the
downgrade would cost the state an additional $190 million to $570 million on
the $12 billion in general obligation bonds that have been authorized, but
not yet issued, for ongoing expenses, including school and transportation
projects.
The agency said the rating was not reduced further because of California's
diverse economy and a proposed revenue bond slated to reimburse the state's
treasury. S&P said a further downgrade could occur if California does not
follow through on plans to issue more than $10 billion in revenue bonds to
pay off its energy-related debts.
The agency put the state's general obligation bonds on a credit-watch ``with
negative implications'' Jan. 19, shortly after California began buying power
for its two largest utilities, Southern California Edison and Pacific Gas and
Electric Co.
On the Net:
Standard & Poors www.standardandpoor.com
,2001 Associated Press ?
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S&P downgrades California's bonds citing energy troubles

Wednesday, April 25, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/04/25/nation
al0443EDT0483.DTL
(04-25) 01:43 PDT SACRAMENTO (AP) -- A major credit rating agency has
downgraded California's state bonds, citing the financial drain from its
continuing energy crisis.
``The downgrade reflects the mounting and uncertain cost to the state of the
current electrical power crisis, as well as its likely long-term detrimental
effect on the state's economy,'' Standard & Poors said Tuesday.
The state's ability to repay its debts, while still considered adequate, has
been reduced, S&P said in dropping the rating on California's general
obligation bonds by two notches from AA to A+.
The agency said the rating was not reduced further because of California's
diverse economy and a proposed revenue bond slated to reimburse the state's
treasury. S&P said a further downgrade could occur if California does not
follow through on plans to issue more than $10 billion in revenue bonds to
pay off its energy-related debts.
The agency put the state's general obligation bonds on a credit-watch ``with
negative implications'' Jan. 19, shortly after California began buying power
for its two largest utilities, Southern California Edison and Pacific Gas and
Electric Co.
On the Net:
Standard & Poors www.standardandpoor.com
,2001 Associated Press ?
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State bond rating lowered
Posted at 10:53 p.m. PDT Tuesday, April 24, 2001
BY JENNIFER BJORHUS

Mercury News

One of Wall Street's top credit-rating houses has downgraded California's
bonds because of the state's handling of the energy crisis, a move that could
ultimately cost taxpayers tens of millions of dollars.
Saying that mounting and uncertain power costs are likely to do lasting harm
to California's economy, New York-based Standard & Poor's on Tuesday lowered
the state's credit rating on its ``general obligation'' bonds two notches,
from AA to A+ with a negative outlook. That puts California near the bottom
of the state bond heap with only one state -- Louisiana -- rated lower.
Standard & Poor's said the rating could go lower if the state cannot resolve
the power crisis.
The downgrade will cost California millions of dollars in coming years
because a lower rating makes it more expensive for the state to issue general
obligation bonds to finance projects such as school construction.
The interest on those bonds, which will rise from an estimated 5 to perhaps
5.25 percent, is paid from the state's tax-financed general fund. Although
the rating change doesn't apply technically to the different type of bond the
state plans to issue by June for power purchases, it will probably make those
bonds more expensive for the state, too, bond experts say.
Heightened urgency
``There's a sense of urgency that this problem has been escalating,
particularly since the PG&E bankruptcy,'' said David Hitchcock, California
analyst for Standard & Poor's. ``This problem could move quickly.''
At least one bond expert said the downgrade was surprising.
``To me it's clear that S&P doesn't have much faith in this power-bailout
plan of the Legislature and the governor. To me that's the reason they did
it,'' said Zane Mann, publisher of the monthly California Bond Advisor
newsletter.
No single new piece of information triggered the downgrade, Hitchcock said.
The major factor, he said, was simply spiraling costs and no long-term plan
for paying the bills. Last week Gov. Gray Davis said the state had been
spending $73 million a day to buy electricity, up from $45.8 million a day in
late March. Hitchcock said some energy traders suspect the actual costs are
higher.
All three major Wall Street credit-rating agencies have California on
so-called ``credit watch,'' but only Standard & Poor's has downgraded. One
municipal bond expert said Standard & Poor's had been ``trigger happy'' and
eager to downgrade. Raymond Murphy, Moody's California analyst, said he had
no immediate plans to change California's bond rating, but that he's anxious
to see officials produce a long-term plan for financing power purchases.
Murphy said he had a conference call with state officials about the issue
Tuesday morning.
``We want the state to develop the plan that gets the general fund out of
power purchasing,'' Murphy said.
The state says it's working on that, but there's a roadblock.
Revenue bonds
A major piece of the state's plan is to have the Department of Water
Resources issue $10 billion to $14 billion in revenue bonds to pay back the
general fund for what has been taken to buy power in recent months. But that
portion of the plan is tied up in a dispute between PG&E and the California
Public Utilities Commission over how to spend the extra money generated by
electricity rate increases. The dispute has also held up the $4.13 billion in
financing the state had arranged to pay down the advances it took out of the
general fund to buy power.
To break the logjam, officials from the state treasurer's office have asked
lawmakers to pass emergency legislation to allow the state to issue the
revenue bonds.
``California's credit rating and financial strength will be in jeopardy until
the state's general fund is repaid for energy costs,'' state Treasurer Philip
Angelides said in a statement Tuesday.
State Finance Director Tim Gage and Gov. Davis both downplayed the
significance of the rate change. Through a press officer, Davis said the
state's economy remains fundamentally strong.
The state was downgraded to a lower A rating in 1994 and went on to see
tremendous economic growth.
Mounting pressure
Still, a downgrade is bad news that sends a psychological signal in both the
finance and real worlds. Some industry watchers said they hope the downgrade
pushes lawmakers and state officials, whom they perceive to be too slow in
responding to the crisis.
``It sounds like the bond market might be out ahead of some of the
policy-makers in California,'' said Severin Borenstein, director of the
University of California Energy Institute. ``We're facing a real emergency
here.''
John Hallacy, managing director of municipal research at Merrill Lynch, said
a lower credit rating puts more pressure on the state to issue the revenue
bonds fast, and to conserve cash.
``We're kind of at the critical juncture now where the pieces are still all
over the floor,'' Hallacy said of the state's efforts to build and approve a
long-term solution to the power crisis.
To Nettie Hoge, executive director of the Utility Reform Network and a
leading critic of the state's efforts to bail out PG&E and Southern
California Edison, the downgrade means ``the analysts are watching.'' She
said she hopes that President Bush and the Federal Energy Regulatory
Commission are watching, too.
``Hopefully, this is a wake-up call for FERC. Those guys could solve this in
a nanosecond,'' Hoge said. ``This is just another milepost on the downward
spiral to economic catastrophe.''

Contact Jennifer Bjorhus at jbjorhus@sjmercury.com or (408) 920-5660.
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Q&A with Gov. Gray Davis on energy issues
Gov. Gray Davis visited the Mercury News editorial board Monday. On the
subject of electricity, Davis talked about increasing the number of power
plants, the rejection of price caps by the Federal Energy Regulatory
Commission, and the condition of the state's two largest utilities, Southern
California Edison and Pacific Gas & Electric. Davis has proposed a deal to
rescue Edison, and the Legislature is considering it. PG&E has filed for
bankruptcy.
Here is a condensed version of Davis' remarks.
Q: What would you like to say by way of introduction about the state's
electricity problems?
Davis: There are really two problems. One is the amount of power available
and the other is the price of power.
In 2002, we'll have more megawatts on line, at least 5,000 more. By 2003,
we'll have a slight excess of power over demand. That's very important.
Because at the moment, we import 20 percent of our power. We have no
leverage. We are at the mercy of forces that show no mercy. That will never
change until we have more power than we need.
OK, price. As you know, the only entity that can influence the [wholesale]
price of electricity is the Federal Energy Regulatory Commission.
Deregulation surrendered the ability of the state to do that.
In 1999, this state for all power, including municipal power, spent roughly
$7 billion. In 2000, we spent $32.5 billion. I don't know what it will be
this year, but it will be substantially higher.
Through all this the Federal Energy Regulatory Commission has refused to do a
thing, zero, zippo. Lest you think I'm being partisan, that commission
consists entirely of Clinton appointees.
The final piece is the financial consequences of what's happened to date. It
is our hope that if we can keep Southern California Edison credit-worthy and
able to re-enter the power purchasing market Jan. 1, 2003, we can then go to
the PG&E creditors committee [the generators to whom PG&E owes money] and say
to them: ``Look at the arrangement we made with Southern California Edison.
We believe that this is a far better deal than PG&E can give you.''
I think this is a fair plan. We get every electron that Edison's utility owns
committed for 10 years, at a cost-of-service basis. Under [current law] they
could sell that next March at market rates. We got $400 million returned from
the holding company, a $3 billion investment in the transmission and delivery
systems .?.?. a permanent easement on about 20,000 acres of environmental
property around all their hydro facilities.
Q: Do you have in mind a finished product for the changes that are happening
in the electric system? What will it look like in a couple of years?
Davis: It is my expectation that the utilities will be purchasing the power
entirely, commencing Jan. 1, 2003. Our goal is to get them back in business.
In addition to investor-owned utilities, I believe we also need a public
power authority. At some point I believe the private sector will say to
itself, ``I want to build new plants to replace the 40-year-old plants, but
do I really want to get the state to a 15 percent margin over supply, thereby
reducing the value of the electrons I already own?'' If they do, God bless
them. But if they don't, at least we'll have the opportunity to build them
ourselves.
Once we have even a slight margin of capacity over demand, the spot market
prices will come down dramatically.
Q: You said in February that you could have solved the electricity problem in
20 minutes if you'd been willing to raise rates. Now, rates are going to be
raised. Should you have favored a rate increase earlier?
Davis: I should have been more specific. I should have said I could have
solved it in 20 minutes if I wanted to triple rates. I think the rate
increase I proposed is fair. It rewards people who are the most energy
efficient, the people who only use up to 130 percent of their baseline. They
are approximately half the state. So half the state will see no rate
increase, beyond the 10 percent that everyone saw in January.
Q: Is the state willing to spend anything it costs to keep the lights on, or
at some point, would it stiff the generators and just say we will accept a
blackout?
Davis: We have to provide power. There are many people who have medical
devices that have to keep running. Blackouts can cause deaths, traffic
accidents, all kinds of calamities that I wouldn't want to happen.
I'm reluctant to tell the generators we'll pay any price, so I'm not going to
say we'll pay absolutely any price, but my bias obviously is to find a way to
keep the lights on.
Q: When will you reveal how much electricity the state has bought, from what
companies, at what prices and what this will cost the state this year and in
coming years?
Davis: We'll reveal an awful lot of information as soon as the bonds go to
market. [The state plans a bond issue to cover the upfront costs of
purchasing electricity.] That information has to be made public. That will
probably be in less than two months.
Believe me, I don't like going around getting beat up for hiding information.
I'm doing it for one reason only, which is that I know every additional edge
I give the generators will result in higher prices for customers.
Q: There's an impression that the state budget is being drained by the power
crisis. Is that right?
Davis: The simple answer to that is no, because the state will be fully
reimbursed with interest as soon as these bonds are sold.
At the moment, in the short term, it is crowding out other spending. But I
think everyone understands that's a temporary phenomenon, until the state is
reimbursed by bonds that are repaid over time through the rate structure that
I proposed.
Q: Would it be your pledge that ratepayers, not taxpayers, will fully repay
the state's cost in purchasing electricity?
Davis: That is the assumption underlying these bonds. That's right as it
relates to electricity, but obviously the conservation incentives came out of
the general fund.
Q: Have you talked to President Bush about this?
Davis: I hear all these rumors as to why the Bush administration doesn't want
to be helpful, but this state, and particularly this region, has been
disproportionately helpful in America's economic growth and technological
productivity. If he wants America to grow, it behooves him to keep California
growing. To date, I think it's fair to say that of my public requests,
President Bush has been responsive to all but the price caps.

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Davis: Power surplus by 2003
Published Wednesday, April 25, 2001, in the San Jose Mercury News
BY DON THOMPSON

Associated Press

SACRAMENTO -- Even as power grid operators warned the state's lights could
flicker again by week's end, Gov. Gray Davis on Tuesday pledged that
Californians will be wallowing in electricity by the end of 2003.
Davis compared the emergency to fighting a large forest fire -- in a few
years, the fire will be out and the state will be out of the energy-buying
business.
Just in case Davis' plans fail, however, an Assembly task force is
considering options, including having the state buy Southern California
Edison.
Critics have hammered Davis for his handling of the power crisis, and his
predictions have faltered before.
In January, Davis set three goals as energy prices spiraled upward and short
supply endangered the state's large investor-owned utilities: to avoid
blackouts, bankruptcies and rate increases.
All three have since happened.
On Tuesday, Davis lowered the bar substantially: ``If the lights stay on, we
will have succeeded. Our goal is to keep the power flowing in this state, to
avoid blackouts, to moderate the price increases in a fair and reasonable way
and reward those who conserve the most, and to chart a steady course.''
Even keeping the lights on may be difficult as temperatures climb this week,
warned the Independent System Operator, which runs the state's power grid.
The ISO declared a Stage 2 emergency Tuesday afternoon when the state came
within 5 percent of running out of electricity after two power plants went
off-line unexpectedly.
Spring's first warm spell is likely to boost demand by 2,000 megawatts -- the
equivalent of two large power plants able to power 1.5 million homes -- the
ISO said in calling for more energy conservation.
The increase comes as hydroelectric power runs low across the dry Northwest,
and as 13,000 megawatts of power remain unavailable due to planned or
unplanned plant shutdowns.
Davis insisted that statewide conservation this summer can stave off
widespread blackouts as the state rushes to build its way out of the supply
shortage.
``At the end of 2003 we will have more power than we need, we will have
regained control of our energy destiny,'' Davis promised in a speech to the
California Chamber of Commerce. ``By the end of 2003 you can have all the
appliances on. You can, you know, don't turn anything off, you can just
luxuriate in all your electricity.''
Davis promised a 15 percent supply surplus by 2004.
To that end, he named former diplomat Richard Sklar to head a new
``generation implementation task force'' of business consultants charged with
speeding up power plant siting and construction. Before entering public
service, Sklar was president of San Francisco-based construction machinery
manufacturer O'Brien Kreitzberg.
Standard and Poors dropped California's credit rating Tuesday, warning that
continued purchases could hurt the state treasury.

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Great America to avoid blackouts
Published Wednesday, April 25, 2001, in the San Jose Mercury News

Associated Press

Paramount's Great America amusement park in Santa Clara has struck a deal
with the municipal utility to keep the power on even during rolling blackouts
this summer.
The park will cut electricity usage by 10 percent on ``high-demand days'' --
which could be nearly every day this summer -- by turning off fountains,
decorative lighting and air conditioning in some buildings.
Santa Clara's city-owned utility, Silicon Valley Power, will use the power
savings to help avert blackouts, said Larry Owens, customer service manager
for the utility. Even if the situation gets dire and blackouts are required,
the park will be exempt because of the arrangement, Owens said.
About 20 companies with facilities in Santa Clara, including Intel Corp., Sun
Microsystems Inc. and Agilent Technologies Inc., have agreed to the same
arrangement, as has Santa Clara University.

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State's bond rating is lowered
The energy crisis brings an A+ designation, which likely will mean higher
borrowing costs.
April 25, 2001
By JOHN HOWARD
The Orange County Register
SACRAMENTO California's electricity crisis prompted a top credit agency to
downgrade the state's credit rating by two notches to its lowest level in
seven years. The move is likely to force the state to pay millions of dollars
more in interest when it borrows.
"It's a statement from Wall Street to California to get your act together,"
said Assemblyman George Runner, R-Lancaster, a GOP energy- finance expert in
the Assembly.
"The ratings action is serious and should be a warning to the state that it
is on the wrong course," added Mark McCray, a municipal-bonds manager at
Newport Beach-based Pimco. "This downgrade will cost the state a lot in terms
of increased financing and costs until, if ever, it is upgraded."
Standard and Poor's Corp., concerned about the $5 billion drained from the
state's coffers to buy power this year, cut California's credit rating from
AA to A+. The reduction applies to voter-approved bonds, called general
obligation, or G.O., bonds, that typically provide funds for schools, parks,
water projects and highways.
About $19.3 billion worth of G.O. bonds have been approved by voters. About
$12 billion have not yet been sold.
The credit-rating cut would force the state to pay higher interest rates to
attract buyers to the unsold bonds. If the state were to sell all $12 billion
under the lower credit rating, it could be forced to pay an additional $190
million to $500 million annually in interest, depending on market conditions.
Shortly after Standard and Poor's announcement, state Treasurer Phil
Angelides urged lawmakers to limit the size of the state's looming
electricity-bond sale to $10 billion - or $2.4 billion less than Gov. Gray
Davis wants.
Angelides said capping the revenue bond at $10 billion would head off legal
challenges from utilities, expedite the passage of the bond plan through the
Legislature and allow the sale to go forward.
"At a minimum, we need an authorization of $10 billion," Angelides said. If
Davis and lawmakers want more, they should do it later, Angelides added.
Davis has sought $12.4 billion. The rift between the governor and the
treasurer, both Democrats, marks their sharpest political divergence since
the energy crisis erupted last year.
A Davis spokesman declined to comment on the difference. "We are working with
the treasurer and others to draft legislation for that bond bill, and we'll
continue to work with him," said Roger Salazar.
The Davis administration hopes to raise the money by selling revenue bonds,
backed by a charge on consumers' utility bills. The sale had been planned for
May but has since been pushed back to June or July at the earliest.
But there is a clock ticking: The state has been spending $45 million to $60
million a day for electricity. The longer the delay in selling the bonds, the
less money will be available to buy cheaper energy for the state under
long-term contracts.
Before funding future power purchases, the bond proceeds must go to pay back
the $5 billion the state has spent on electricity purchased since January on
behalf of California's three big cash-strapped utilities.
While the Standard and Poor's downgrade won't directly affect the electricity
bonds, since they won't be G.O. bonds, it does reflect Wall Street's concern
about the unstanched outflow of state funds.
"In my mind there's no doubt that S&P is doing this because they simply don't
have faith in the proposed bailout and what the state is going to have to go
through to solve its power problems,' said Zane Mann, the editor of a
newsletter that tracks California's general-obligation bonds.
Mann said the A+ rating puts California "below average" nationally. The
rating downgrade sliced the value of an existing 30-year California G.O. bond
by 3.5 percent, he said. But since most investors who buy California bonds
hold them to maturity, Mann said the losses would be largely confined to
paper.
Assemblyman Fred Keeley, D-Boulder Creek, who authored the bill that
authorized the power bonds, said the sale should be limited to the $10
billion originally provided for in the bill. The bill provides for the
utilities to forward money collected from ratepayers to the state Department
of Water Resources, which purchases the power.
As the state spent more than anticipated on emergency electricity purchases,
Davis sought to increase the size of the bond sale. But that suggestion has
led the utilities to challenge the bill's rate- diversion mechanism, which
has "put a cloud on our ability to acquire financing," Keeley said.
Assembly Republican Leader Dave Cox of Fair Oaks said he would strongly
support any move to cap the amount of borrowing the state would do to buy
electricity.
His staff said Republicans are skeptical that the ratepayers' revenues are
sufficient to cover the costs in the Davis administration's electricity-
rescue plan.
"Nobody believes that the revenue stream is wide enough to cover all the
governor's energy solutions. It's still being sucked up by the state's
utilities," said Cox spokesman Jaime Fis Fis.
Register staff writers James B. Kelleher and Diana McCabe and the Associated
Press contributed to this report.

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Fire stokes wholesale gas cost
The question is whether the retail price will climb, too.
April 25, 2001
By ANNE C. MULKERN
The Orange County Register

The Tosco refinery fire may fuel rising prices on the gasoline retail market.
The spot-market price rose 10 cents within hours of the fire.
Photo: Leonard Ortiz / The Register
?
?

Wholesale gasoline prices jumped Tuesday, a day after fire erupted at Tosco
Corp.'s Carson refinery.
But energy experts said it is too soon to know whether the fire will drive
retail gas prices higher.
Gas prices already are climbing because of increased demand heading into
summer, higher costs for additives that make cleaner-burning fuel and a shift
in marketing strategy by Tosco, which wants to sell less gas at a higher
price.
The refinery fire has the ability to worsen an already bleak situation,
energy experts said.
"It doesn't take much in this market,'' said Suzanne Garfield, California
Energy Commission spokeswoman. "It's very volatile.''
Tosco said it will shift any lost gasoline production to its Wilmington
refinery. It was unclear, however, how long the Carson refinery would be down
for repairs. Tosco spokesman Clark Wrigley couldn't say whether the
Wilmington plant could make enough gasoline to meet the company's needs in
Southern California.
Within hours of the fire, gas prices had jumped 10 cents per gallon on the
spot market, a daily market where refiners sell surplus supplies. That was
driven mainly by speculation, as those with gas to sell waited to see how
high the price would go. Prices later fell back to an increase of about 3
cents from a day before.
"Just the fact that there is a hiccup in the refinery makes everyone cringe
and say, 'I'm not going to sell,''' said Bob van der Valk, manager at Cosby
Oil, a Santa Fe Springs gasoline wholesaler.
A day or so of higher spot prices probably won't affect retail costs. But if
wholesale prices stay up for several days, retailers will pass on those costs
to consumers.

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Power Companies and Regulators Must Take Steps To Avoid Spread of
California Power Virus/ Andersen Analysis

WASHINGTON--(BUSINESS WIRE)--April 24, 2001 via NewsEdge Corporation  -
A "new virus spawned
in California" poses formidable challenges requiring new strategies on
the part of power companies, regulators and policymakers to contain
and reverse its damage, according to "Energy Crisis in the Western
United States: Lessons for Navigating Regulatory and Market
Minefields," a new Andersen report released today.

"The implications for the development of competitive energy
markets go far beyond the Western United States," Andersen's national
utility practice head Matthew D. Smith told a Washington briefing.
"Unfortunately, California has taught the nation that regulatory and
political barriers can create and sustain an energy crisis."

"California has demonstrated that the risks in the electricity
industry, if not properly acknowledged and managed, can simultaneously
and profoundly impact all market participants. To be effectively
managed, these risks need to be exposed, assumed or shared, measured
and monitored. When they are hidden or ignored, all parties can
potentially suffer. A shared, integrated view of these risks, and a
strategy for their assumption and management, is critical to avoiding
rapid value destruction within the energy market," Smith said.

An Andersen survey of senior utility executives outside
California, also released at the briefing, indicates most utility
companies believe they inoculated themselves against the California
virus so that it is unlikely to affect their operations beyond slowing
the pace of deregulation and increasing investor scrutiny. However,
based on the potential implications it sees of the California
situation, Andersen believes a series of booster shots are advisable
for power companies and regulators. "To deliver reliable service at a
predictable cost in today's environment, companies must focus on
market integration by developing new and innovative relationships
between suppliers, customers, employees and investors -- while working
with government officials and regulators to chart a smoother
transition to a deregulated power market," according to Smith.

Eight Implications

The Andersen report identified eight overriding implications
emanating from the Western energy crisis that are shaping the
longer-term operations of the Western grid, the regional and national
economy, domestic energy policy and the industry's evolution:

1.  Increased deregulation uncertainty and risk -- Tension and

differences between state and federal regulators raise the

specter of repeating the regulatory and political conundrum

California's investor-owned utilities have faced. If federal

initiatives open wholesale markets while retail markets remain

regulated, a crucial question is raised: Will state regulators

pass-through higher wholesale costs if they should

materialize? Tensions between state and federal regulators

over policies on deregulation will grow if states delay or

abandon retail competition.

As wholesale markets are deregulated and RTOs begin operating,

the prudence principles that state regulators have used for

many years may have to be changed. For example, if FERC and

RTO monitors determine that deregulated wholesale markets

operate fairly, prices derived from those markets must be

considered reasonable. If so, these costs should be allowed

into state-regulated retail rates without regard to the

prudence principles state regulators have used for years.

Therefore, utilities' traditional burden of proving costs are

or are not justifiable shifts to regulators.

2.  Reduced investor confidence -- Prior to deregulation,

stringent prudence review and disallowance of generation costs

in the rate base made regulatory risk largely uncontrollable,

killing IOU interests in most new investment. A major purpose

of deregulation was to create an environment in which risk

could be managed, but California's political and regulatory

environment provides only a limited ability to manage risks.

The confidence and perceptions needed to support investment

decision-making will be slow to return given the approach of

the state to remedy the crisis.

3.  Contributing factor in economic softening -- Uncertain energy

reliability and higher costs can drive-out marginal

businesses, cause healthy companies to constrain expansion,

and lead new entrants to question whether to make new

investments. As such, an extended energy crisis contributes to

inflation pressures and may slow economic growth.

4.  Increased pressure on the Western grid -- Even as capacity

increases and demand reductions work to resolve the California

crisis, these solutions have long-term implications for the

Western Grid. These include a realistic possibility of

California becoming an "energy island" as a result of

near-term reduction in available regional resources for export

to California; increased emphasis on security control to

protect against overall Western grid failure as sub-regions

have problems; RTO requirements to strengthen locally

available supplies to bolster overall system reliability;

longer-term development of new plants using plentiful coal

resources and clean coal technology will alter the pattern of

imports into California; and the emergence of Mexico as a

major supplier to southern California and Arizona,

contributing to a bifurcation of the Western Grid into

northern and southern markets.

5.  Unbundling failures that push companies back to portfolio

strategies -- For California investor-owned utilities,

unbundling has achieved neither the least-cost solution sought

by regulators nor value maximization targeted by investors.

This necessitates a reevaluation of portfolio management

strategies potentially involving generation, transmission,

power trading and marketing, and retail businesses in multiple

geographies serving multiple markets.

6.  Ineffectiveness in changing siting and development

restrictions -- California's retail price caps and multiple

explanations for the crisis have left accelerated siting

processes and environmental standards changes open to

challenge by various interests. In addition, limiting

application of new siting orders only to small generators

contributes to uncertainty and investor hesitancy.

7.  Procurement management that alters user-utility negotiating

leverage -- Competitive markets compel participants --

suppliers, marketers, large industrial buyers, etc. -- to

strategically manage procurement as a critical value-driver.

Because risk is explicitly shared and always has the potential

of shifting advantage to either seller or buyer, the

sophistication of negotiations and contracts increases as

competitive markets evolve.

8.  Increased emphasis on distributed generation and new

technologies -- California's reliability and price challenges

have triggered a re-emergence of energy crisis measures from

the 1970s. End-users are investing in solutions they control,

and the distributed generation market is being aggressively

developed among large retailers, industrial users and

residential customers. This makes possible the development of

microgrids connecting consumers in local areas and related

changes in traditional grid systems, from modifications in

interconnection agreements to changing definitions of reserve

margins and system reliability.

Industry Executives' Response

Senior executives from sixteen non-California utilities with a
combined market capitalization over $120 billion and $145 billion in
revenues responded to an Andersen survey with their views of the
implications of the California power crisis for their companies and
for the industry. The survey, conducted between February 19, 2001 and
March 2, 2001 by Knowledge Systems & Research, Inc. of Syracuse, found
that the companies are observing the California situation carefully,
expect a slowing -- but not a turnaround -- of deregulation, and
believe their internal plans and preparations are on-target for the
changing environment:

--  Deregulation -- Nearly all executives believe recent

California events will slow the pace of deregulation over the

next five years for states that have not begun or finished

writing restructuring legislation. None believe that it will

cause advanced states to re-regulate markets, although many

states will review their legislation to assess their risk of

duplicating California's current situation and make any

changes necessary to avoid it.

--  National legislation -- Few executives suggest the situation

will initiate national energy policy/legislation; others

believe it will be a continuing issue but, because of

state-to-state variances, Congress will be unable to pass any

comprehensive measures or force states to a restructuring

timeline. Some expect additional state-level legislation.

--  Company strategies -- Most do not see any changes to their

business models or strategies for generation, distribution or

supply procurement as a response to the situation in

California. However, many have expanded their risk management

programs, reduced spot market purchases, begun emphasizing

long-term supply contracts, planning new power generation

capacity, and started hedging with futures trades. Those

facing price caps are rethinking their stance on them.

--  Investor scrutiny -- Many executives indicate their

shareholders are aware of the situation and investors --

particularly institutional investors -- are more heavily

scrutinizing their actions. Many say news coverage has

prompted retail, commercial and industrial customer skepticism

of industry restructuring.

--  Transmission deregulation -- Many executives agree the

California situation will increase interest in FERC's regional

transmission organizations (RTO) deregulation effort.

Utility Company Action Items

Both to guard against a sudden California cascade and as a
potentially powerful competitive thrust, forward-thinking utilities
should bolster their basic preparedness with a variety of tactics --
or inoculations -- specifically aimed to combat a potential California
power virus, according to Andersen partner Mark Moskovitz:

--  Improve procurement management and risk management

capabilities -- To manage exposure to volatile supply and

demand shifts, organizations must be sure that comprehensive

and clear supply procedures, controls, decision points, risk

limits and communications are in place.

--  Plan and design innovative rate and pricing structures --

Companies and regulators must focus on communicating price

signals that create value for both the customer and the

provider. Innovative rate and pricing structures that more

closely tie the customer's price to the real cost of supply

will better signal the value of the service as well as

providing more accurate information upon which both end user

and supplier can make decisions.

--  Increase emphasis on demand side management (DSM) strategies

-- In addition to new pricing strategies to help achieve and

maintain supply-demand equilibrium, companies must now focus

on employing more extensive and innovative demand side

management programs. These programs may offer significant

benefits with limited risk to both the customer and energy

supplier.

--  Assess the supply and generation dynamics in adjacent

jurisdictions -- Companies must take a broader view -- beyond

typical geographic market definitions -- of the economics of

generation and related business decisions in an increasingly

volatile market in which supply will follow the best prices.

--  Develop contingency plans for the continued deferral of new

generation capacity -- In the face of potential ongoing

generation capacity shortages, companies and regulators must

be prepared to move with a portfolio of strategies to meet

demand, including for example DSM, flexible pricing and

distributed generation. In addition, they should explore

efficiency-improving upgrades to existing facilities and seize

any opportunity to accelerate near-term construction plans.

--  Proactively address potential organizational disruption -- As

regulatory and economic changes continue to churn the industry

waters and companies adjust and/or restructure, they must be

highly cogniscent of, sensitive to, and directly address

employees' concerns with information about the company's

future and theirs'.

Industry/Regulatory Lessons

There are also a number of broad primary lessons the electric
power industry -- nationally and internationally -- should take away
from its first major domestic test case in deregulation and
restructuring, according to Andersen principal David O. Jermain:

--  Simplify market design.

--  Build a continuing role for regulators.

--  Maintain communications with multiple constituent interests.

--  Prepare contingency plans for extreme stress conditions.

--  Couple real-time retail pricing with transparently priced

wholesale competition.

--  Provide special incentives for RTO investment, formation and

development.

--  Break down regulatory and political barriers to market signals

and responses.

Andersen is a global leader in professional services. It provides
integrated solutions that draw on diverse and deep competencies in
consulting, assurance, tax, corporate finance, and in some countries,
legal services. Andersen employs 85,000 people in 84 countries.
Andersen is frequently rated among the best places to work by leading
publications around the world. It is also consistently ranked first in
client satisfaction in independent surveys. Andersen has enjoyed
uninterrupted growth since its founding in 1913. Its 2000 revenues
totaled US$8.4 billion. Learn more at www.andersen.com.

Copies of the "Energy Crisis in the Western United States: Lessons
for Navigating Regulatory and Market Minefields" report can be
obtained at www.andersen.com/energyandutilities.

A PDF copy of the report can be obtained by contacting Melanie
Fahey at 713/222-1600 or mfahey@sommersassoc.com

CONTACT: Sommers & Associates, Houston | Tom Sommers, 713/222-1600 |
tsommers@sommersassoc.com |
or | Andersen, Houston | Melissa Spradley, 713/237-2385 |
melissa.l.spradley@us.andersen.com

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Soaring Temperatures Produce Call for Conservation;
California ISO Also Announces New Outage Notification System and On-call
Number

FOLSOM, Calif.--(BUSINESS WIRE)--April 24, 2001 via NewsEdge Corporation  -
As the mercury
climbs this week, the California Independent System Operator
(California ISO) is reminding consumers to curb their electricity use
in order to minimize the strain on the power grid. The first warm
spell of the season is expected to cause temperatures to jump 10
degrees, leading to a 2,000 megawatt increase in electricity
consumption -- the equivalent of two large power plants. The week
started out with a peak demand of 28,835 megawatts, but by tomorrow it
is forecasted to top 30,500 megawatts. This comes as hydroelectricity
resources (both Northwest and California) run low, more than 10,000
megawatts of power plants remain off line due to planned and unplanned
maintenance, and some 3,000 megawatts of Qualifying Facilities or
alternative energy suppliers are not operating.

The California ISO's renewed call for conservation precedes a
forecast of 90 degree highs in the inland areas that may tempt many
Californians to flip on air conditioners. For conservation tips --
such as using fans instead of air conditioners, setting thermostat at
78 degrees, etc. -- please see the California ISO's web site
www.caiso.com.

New Notification System:

With a challenging summer around the corner, the California ISO
wants to do all it can to bring information to the public as quickly
as possible. For that reason, a new notification system is being
brought on line. Media and the public can now access the Internet to
keep current if rotating blackouts are issued.

Navigation:

Visit www.caiso.com

Click on System Conditions for current information on rotating

outages (will appear only when activated) For previous outage

information (last hour, etc.), click on Market Notices, scroll to

bottom of page and click on Notice Log

The California ISO is also testing a new service to notify
newsrooms immediately by email should the ISO initiate electrical
emergencies (Stage One - Three) or rotating outages. If you would like
to participate, please email kwerst@caiso.com with a maximum of one
email address per newsroom.

Additionally, a single on-call media pager number has been
established: 916/815-0679. To make it easier on media, ISO
Communications will no longer be posting on-call schedules for media
spokespersons on the web site. Simply call the on-call pager after
hours.

News releases alerting the media to electrical emergencies will
continue, as will news conferences held on-site in Folsom and via
telephone. As a reminder, if you wish to visit the ISO control rooms
(in Folsom or Alhambra) always call ISO Communications first at
888/516-NEWS to make an appointment. Access to the control rooms may
be limited on certain days, depending on system conditions and/or
level of requests from media.

CONTACT: California ISO | Patrick Dorinson, 888/516-NEWS | Media Hotline:
888/516-NEWS