California’s energy misfortunes; Industry Overview

Energy User News

California’s energy misfortunes multiplied almost daily as the year 2000 drew to a close. Utilities said they were running out of credit; at least one major supplier with-drew from the market; and the U.S. Department of Energy (DOE) invoked emergency powers. California lawmakers met in special session, where they drafted a flurry of bills to reform the state’s distressed power market.

California Governor Gray Davis (D.) huddled in Washington, DC, with Federal Reserve Chairman Alan Greenspan and U.S. Treasury Secretary Lawrence Summers, a move that suggested that the energy crisis might be putting the state’s economy at risk as well. Details of the meeting were not immediately released, nor were particulars of a conference with President Bill Clinton made public.

The California Public Utilities Commission (PUC) convened hearings to consider requests from the state’s two largest utilities to raise rates by up to 30% in order to pay the approximately $ 8 billion they say they have been forced to pay for wholesale electricity but have been unable to collect from end users. Consumer advocates were livid at the suggestion. Eventually, the PUC approved rate increases from 7 to 15% while voting to escrow the funds until an audit revealed whether the rate increase was warranted. Predictably, the outcome satisfied no one.

A Lot at Stake

Clearly, there is a lot at stake, including the future course of deregulation and the economy of the region. California’s energy crisis could become the first big test for President George W. Bush, say some observers.

Davis branded the deregulation experiment a “colossal” failure. “If deregulation fails in California, it is dead in America,” he added.

Davis, normally mild-mannered by most accounts, also criticized federal regulators for dragging their feet. He charged that the Federal Energy Regulatory Commission (FERC) had “chosen to ensure unconscionable profits for the pirate generators and power brokers who are gouging California consumers and businesses.” He also complained that those in charge of the state’s power grid were not doing their job.

Complicating the scenario is that a new administration is about to assume power in Washington, and that may mean a new energy secretary with a free-market outlook at odds with the California governor’s position.

FERC Chairman Reappointed

President Clinton reappointed FERC Chairman Hoecker to the commission and to the chairmanship under a procedure, called a recess appointment, that allows the president to fill vacancies during a recess of the Senate by making appointments that last until the end of the next Senate session.

Hoecker was nominated to another five-year term in November of last year, but the Senate took no action on the nomination. More recently, Hoecker announced his resignation effective January 15th. President-elect Bush was expected to name Commissioner Curt Hebert as the new chair.

The FERC chairmanship aside, federal response to the issue remains uncertain. FERC measures so far have been criticized, and the California crisis may by sapping support for any federal electric industry restructuring legislation, says Senate Energy Chairman Frank Murkowski (R.-AK). Deregulation legislation failed to reach the floor in either the House or the Senate during the last session.

For now, there is little consensus on what should be done to resolve the electricity dilemma and keep the lights on in California. Whether the market will “self correct” or whether a return to a commandand-control regulatory model is needed remains to be seen.

Davis and other California officials are demanding that rate caps be restored to curtail what they say is price gouging by greedy electricity generators.

And most consumer groups want nothing less than a scrapping of deregulation altogether and a return to the former, state-controlled system.

Credit Crisis

Standard & Poor’s reportedly placed Southern California Edison and Pacific Gas and Electric, and their parent companies, on watch for a credit-rating downgrade. Fitch Investors Services Inc. lowered its ratings on the two utilities’ debt and preferred stock, according to published reports.

It’s not only the major utilities that are feeling the fallout from the out-of-control market. Standard & Poor’s also placed on CreditWatch with negative implications both the California Independent System Operator Corp. (Cal-ISO) and the California Power Exchange Corp. (CaIPX), the two nonprofit state corporations charged with the sale and transmission of electricity in the Golden State’s jolted power market.

Moody’s Investors Service announced that it placed under review several municipal-owned electric utilities that rely on power purchased in California’s overheated wholesale electricity market for a significant share of their resources.

Likewise, the financial problems faced by California’s biggest utilities may well spill over to some of the independent companies that sell power to them under long-term contracts, according to credit ratings analysts at Standard & Poor’s.

To the extent that major utilities are counter-parties to long-term contracts with independent power producers, a bankruptcy filing by the utilities would likely trigger a default under most power purchase agreements or a stay of payments, which in turn would trigger a default under most lending agreements.

Supplier Suspends Sales

New West Energy, an affiliate of Salt River Project (SRP), announced that it would suspend commodity sales in California and would transition its customers back to Pacific Gas & Electric (PG&E) and Southern California Edison. New West said that “recent regulatory actions in California, coupled with current supply shortages and price volatility, have had the effect of imposing unmanageable financial risks to energy service providers.” New West Energy was delivering nearly 600 MW of electricity before suspending its operations.

What many non-Californians may not know is that while for much of the state news of Stage 1 and Stage 2 power alerts were becoming routine, Los Angeles was humming along with few worries. The state’s most populous city, along with some three dozen cities, towns, and rural districts in California decided to sit out the state’s deregulation experiment and provide their own electric service.

With its own power plants and transmission lines, the Los Angeles Department of Water and Power (LADWP) generates up to 7000 MW of electricity, usually more than its 1.4 million customers need. In fact, according to local news reports, LADWP has been able to sell an average of 1200 MW a day onto the power grid serving the rest of California. Profits from those sales, say reports, will allow LADWP to pay off its $ 4 billion power-plant debt by 2003 and give its customers a 10% rate discount, a spokesperson says.

Not surprisingly, a number of other cities, from San Francisco to San Diego, recently have discussed the idea of starting their own municipal power systems.

FERC Sets Soft Cap

In an attempt to quickly solve the day-to-day problems facing most Californians, FERC set a “soft” price cap on wholesale rates and let the state’s investor-owned utilities keep the power they generate rather than sell it on the open market, as required under California’s 1996 utility deregulation law. The cap sets wholesale electricity prices at $ l50/MWhr, and suppliers that want to charge more would have to prove higher prices are warranted.

Washington Gov. Gary Locke (D.) said he was disappointed the commission didn’t cap prices on the wholesale cost of electricity throughout the West.

“FERC’s order today is at best incomplete, at worst ineffective,” Locke said in a statement. “While it falls short of providing California consumers the immediate relief they need from soaring energy prices, it ignores altogether that consumers and businesses in the Pacific Northwest are also being harmed.”

Similarly unsatisfied with FERC actions thus far, Southern California Edison (SCE), a unit of Edison International, sued the commission, asking that it be ordered to force power generators to charge more reasonable rates.

In what was called an “unusual” petition for a “writ of mandamus” filed with the U.S. Court of Appeals for the District of Columbia Circuit, SCE asked the court to order FERC “… to fix by order just and reasonable cost-based rates … for sales in the markets operated by the California Independent System Operator Corporation and the California Power Exchange.” The California Public Utilities Commission (CPUC) also filed in support of SCE’s petition with FERC. In its motion, the CPUC noted “California will suffer irreparable harm if the FERC orders at issue are not immediately reversed. It is critical that the court act promptly to require FERC to do its duty under the law.”

DOE Weighs In

Energy Secretary Bill Richardson, in mid-December, enacted emergency authority under the Federal Power Act to prevent blackouts in California, a step that had been used only extremely rarely in the past, he noted.

The emergency order requires that if Cal-ISO determines there is an inadequate supply, of power, those suppliers who have supplied power in the last 30 days might be required to make power available to the ISO, assuming that they have power available in excess of the amount required to satisfy firm customers. If the supplier and Cal-ISO are unable to reach an agreement on the price for the power, the order leaves it to FERC to determine a “just and reasonable rate” at a later date.

Consumer Groups

Consumer groups, who were sold on deregulation with promises of lower rates, are adamantly against rate increases. One leading activist rejected any solution to California’s energy crisis that involves ratepayers helping the utilities pay off a combined $ 8 billion in debt.

“We will not be part of a negotiated settlement,” declared Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Critics say a bailout would in effect stick Californians twice– and let the utilities walk away from “the most expensive public policy mistake in history” in better shape than they went into it.

Consumer groups further charge that the utilities are overstating their deficits, which reflect only their position as buyers of wholesale power and don’t take into account profits they have made as sellers of power. Further, the groups complain, consumers shouldn’t be forced to pay for policies that the utilities themselves aggressively supported.